Macro economics Class 12th Balance of Payments .pptx

Class 12th Balance of Payments

1. Main Components of BOP Balance of Payment (BOP) Balance of Trade (BOT) Components of BOP: Current Account & Capital Account Autonomous & Accomodating items Deficit (Disequilibrium) in the BOP

2. Introduction Discover how the Balance of Payments shapes a country’s economic destiny. It records every financial interaction with the world, highlighting strengths and opportunities. Understanding this empowers us to make impactful decisions that drive growth and global influence. BOP is a summary statement in which all the ‘Economic Transactions’ between ‘Residents’ and rest of the world are recorded during a particular period of time(usually, one year).

3. Definition The Balance of Payments is an accounting statement that provides a systematic record of all the economic transactions, between Residents of a country and the rest of the world, in a given period of time. Who are included in Residents? Individuals Firms Govt agencies Who are not included? Diplomatic staff Foreign military personnel Tourists Migratory workers Branches of foreign company, Even though they work and operate within the domestic territory of the country

4. Economic Transactions Refer to those transactions which involve transfer of the title or ownership of goods, services, money and assets.

5. Visible Items : These include all types of physical goods which are exported and imported.These are called visible items as they are made of some matter or material and can be seen, touced and measured. The movement of such items is open and can be verified by the custom officials. Invisible Items : Invisible items of trade refer to all types of services like shipping, banking, insurance etc, which are given and received.These are called as they cannot be seen, felt, touched or measured. Unilateral Transfers : include gifts, personal remittances and other ‘one-way transactions’. Since these transactions do not involve any claim for repayment, the are also known as unrequited transfers. Capital Transfers : relate to capital receipts(through borrowing or sale of assets) and capital payments (through capital repayments or purchase of assets.

6. Structure of BOP BOP accounting uses ‘Double Entry System’ BOP account has 2 sides: Credit side Debit side All inflows or sources of foreign exchange are recorded on debit side . All outflows or uses of foreign exchange are recorded on debit side.

7. In economic sense, BOP need not be always equal. It means, BOP can be: Balanced BOP Surplus BOP Deficit BOP BOP is when receipts of foreign exchange are equal to payments of foreign exchange. BOP is in surplus when receipts of foreign exchange are more than payments of foreign exchange. BOP is in deficit when receipts of foreign exchange are less than payments of foreign exchange.

8. Meaning of BOT The balance of trade refers to difference between the amounts of exports and imports of visible items (goods). BOT = Exports of goods – Imports of goods Exports are entered as credit (+ ve ) items in the BOP account, while imports are entered as debit (- ve ) items. BOT also known as ‘Balance of Visible Trade’ or ‘Trade Balance’.

9. Balance on Balance of Trade. The balance of trade need not balance itself, i.e. it is not necessary that exports of goods is always equal to import of goods. Balance on BOT can be surplus(+ ve ) or deficit (- ve ). Surplus BOT (+ ve ) Deficit BOT (- ve ) If a country exports more goods than what it imports, the BOT is said to be in surplus, i.e. BOT is ‘favorable’ for the country. If import of goods exceeds the export of goods, then the country is said to have a deficit BOT, i.e.BOT is ‘ unfavourable ’ for the country.

10. Difference between BOP & BOT Basis BOP BOT Meaning It is an accounting statement that provides a systematic record of all economic transactions, between residents of a country and rest of the world in a given period of time. refers to difference between amounts of exports and imports of visible items. Components BOP includes visible items, invisible items,unilateral transfers & Capital nature. BOT includes only visible items. Capital transactions It records all transactions of capital nature. It does not record any transaction of capital nature. Scope It is a wider Concept & it includes BOT. It is a narrower concept as it is only a part of BOP account. Settlement Unfavourable BOP cannot be met out of favourable BOT Unfavourable BOT can be met out of favourable BOP.

11. Components of BOT 1) Current Account 2) Capital Account It refers to an account which records all the transactions relating to export & import of goods and services and unilateral transfers during a given period of time. Current Account contains the receipts & payments relating to all the transactions of visible items, invisible items & unilateral transfers. What is Current Account?

12. Components of Current Account 1) Export & Import of goods (Merchandise Transactions or visible Trade) A major part of transactions in foreign trade is in the form of export & import of goods (visible item). Payment for import of goods is written on the - ve side (debit items) & receipt from exports is shown on the + ve side(credit items). Balance of these visible exports & imports is known as BOT (or trade balance). 2) Export & Import of services (Invisible Trade) It includes a large variety of non-factor services (known as invisible items) sold & purchased by the residents of a country to and from the rest of the world. Payments are either received or made to the other countries for use of these services. Services are generally of 3 kinds: Shipping Banking Insurance Payment for these services are recorded on the - ve side & receipts on the + ve side.

13. 3) Unilateral or Unrequited Transfers to & from abroad ( one sided Transactions): Unilateral transfers include gifts,donations,personal remittances and other ‘one-way’ transactions. These refer to those receipts and payments, which take place without any service in return. Receipt of unilateral transfers from the rest of the world is shown on the credit side & unilateral transfers to rest of the world on the debit side. 4) Income receipts & payments to & from abroad: It includes investment income in the form of interest, rent &profits. Current Account shows the Net Income Current account records all the actual transactions of goods and services which affect the income,output and employment of a country. So, it shows the net income generated in the foreign sector.

14. Difference between BOT & Current account Basis BOT Current Account Components BOT includes only visible items. Current Account records both visible and invisible items. Scope It is a narrow concept as it is only a part of current account. It is a wider concept and it includes BOT.

15. Balance on Current Account In the current account, receipts from export of goods,services & unilateral receipts are entered as credit or + ve items & payments for import of goods, services & unilateral payments are entered as debit or - ve items. The net value of credit & debit balances is the balance on current account.

16. CAS signifies that the nation is a lender to the rest of the world . Current account Surplus(CAS) It arises when credit items are more than debit items. It indicates net inflow of foreign exchange. CAS arises when the value of exports of goods and services is more than the value of imports of goods and services.

17. Current Account Deficit (CAD) It arises when debit items are more than the credit items, i.e. when foreign exchange receipts in the current account fall short of foreign exchange payments, It leads the current account deficit. It indicates net outflow of foreign exchange. CAD arises when the value of exports of goods and services is than the value of imports of goods and services CAD signifies that the nation is a borrower from the rest of the world.

18. Credit items Debit Items Net Credit(Credit- Debit) Visible Trade Exports of good Imports of goods Net exports of goods (BOT) Invisible Trade Exports of Services Imports of services Net exports of services Unilateral Transfers Transfer Receipts Transfer Payments Net transfer receipts Income Receipts & Payments Income receipts Income Payments Net income receipts Current receipts (1+2+3+4) Current Payments Current Account Balance Components of Current Account

19. 2. Capital Account Capital Account of BOP records all those transactions, between the residents of a country and the rest of the world, which cause change in the assets or liabilities of the residents of the country or its government. Capital Account is used to: 1) Finance deficit in current account 2) Absorb surplus of current account Capital account is concerned with financial transfers.So , it does not have direct effect on income,output and employment of the country.

20. Balance on Capital account The transactions,which lead to inflow of foreign exchange are recorded on the credit or positive side of capital account. Similarly,transactions,which lead to outflow of foreign exchange are recorded on the debit or negative side. The net value of credit and debit balances is the balance on capital account. Surplus in capital account arises when credit items are more than debit items.It indicates net inflow of capital. Deficit in capital account arises when debit items are more than credit items.It indicates net outflow of capital. There is one more element in BOP, known as ‘Errors and Omissions ’. It is the balancing item,which reflect the inability to record all international transactions accurately.

21. Credit items Debit items Net credit (Credit-Debit) Borrowings and lendings to and from abroad Borrowings from abroad Lendings to abroad Net Borrowings from abroad Investments from abroad Investments to abroad Net investments from abroad Change in foreign exchange reserves Decreases in foreign exchange reserves Increases in foreign exchange reserves Net change in foreign exchange reserves Capital Receipts (1+2+3+) Capital Payments Capital Account Balance Components of Capital Account

22. Basis Current Account Capital Account Influence on the economy Current account transactions bring a change in the current level of a country’s income. Capital transactions bring about a change in the capital stock of a country. Concept It is a flow concept as it includes all items of flow nature. It is a stock concept as it includes all items expressing changes in stock. Components Current Account=Visible trade+ Invisible Trade+ Unilateral transfers+ Income receipts and payments. Capital Account= Borrowings and lendings to and from abroad= Investments to and from abroad+ Change in foreign Exchange Reserves. Difference between Current Account and Capital account

23. Autonomous Items Vs Accommodating Items Basis Autonomous Items Accommoodating Items Meaning Autonomous items refer to those international economic transactions, which take place due to some economic motive such as profit maximization. Accommodating items refer to the transactions that are undertaken to cover deficit or surplus in autonomous transactions. Effect on BOP account Are independent of the state of BOP account Are undertaken to maintain the balance in BOP account Current/Capital Account Take place on both current and capital accounts Take place only on capital account Alternate Name Also known as ‘above the line items’. Also known as ‘below the line items’.

24. Deficit (Disequilibrium) in the BOP Disequilibrium in BOP of a country may be either in the form of deficit or as a surplus. A surplus in BOP does not pose much of a problem. However, a deficit often creates difficult problem for the economy. Deficit on balance of payments account arises when total inflows on account of autonomus transactions are less than total outflows on account of such transactions . On the other hand, if total inflows on account of autonomous transactions exceed total outflows on account of such transactions, then there is surplus in balance of payments accounts.

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