Balance of Payments
BY: Azhar. Ali (Азхар)
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Definition of BOP
The BOP is merely a way of listing receipts and
payments in international transactions for a
country.
or
It is a systematic record of all economic
transactions of a country with the rest of the
world in a given period of time.
BY: Azhar. Ali (Азхар)
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Explanation of the Definition
These economics transactions consists of
exports of goods, imports of goods export of
services and imports of services, out flow of
capital, inflow of foreign capital.
BY: Azhar. Ali (Азхар)
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Objectives of BOP
1. The main objective of the BOP is to inform the
govt. of the country about its international trade
position.
2. It shows the changes in net position of the
country. Mean balance of payment show the net
position of export and import. If export are
more than import our net position will be
positive and if import are more than export net
position will be negative.
3. Help the govt. in the formulation of trade policy.
BY: Azhar. Ali (Азхар)
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Balance of Trade Vs. Balance of
Payment
Balance of Trade: The value of nation’s visible
exports minus the value of its visible imports.
Trade balance is also called net export. If the
value of goods exported by a country exceeds
the value of goods imported, then the balance
of trade of a country is called favorable or
surplus, while in the opposite case, it is known
as adverse or deficit.
BY: Azhar. Ali (Азхар)
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Conti
For example, Let the balance of trade of a
country for a particular year be:
exports (goods)
$8 billion
imports (goods)
-10 billion
balance of trade
-2 billion
so here the balance of trade of the country
is deficit.
BY: Azhar. Ali (Азхар)
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Structure of balance of BOP
The BOP accounts of a country is constructed on
the principle of double- entry book keeping.
Every international transaction automatically enters
the balance of payments twice:
once as a credit (+) and once as a debit (-).
For example:
When payments received from a foreign country, it
is credit transaction while payments to a foreign
country is a debit transaction.
BY: Azhar. Ali (Азхар)
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The Balance of Payments Accounts
• Three types of international transactions are
recorded in the balance of payments:
 Exports or imports of goods or services: these are
those goods and services that we use for personal
consumption.
 Purchases or sales of financial assets: these are
those goods and service that we use for further
production.
Transfers of wealth between countries: it means
foreign investment. Like Alkozy company
investment their money in Dubai.
BY: Azhar. Ali (Азхар)
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The Flow of Currencies:
Whisky sold to Italian hotel
Export earnings for UK
(Credit on Balance
of Payments)
€ ( lira) changed to £ (pound)
BY: Azhar. Ali (Азхар)
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The Flow of Currencies:
Oil from Russia
Oil
£ changed into Roubles
Export earnings for Russia
Import expenditure for the UK
(Debit on balance of payments)
BY: Azhar. Ali (Азхар)
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Import Goods- Money Goes Out of
Country
BY: Azhar. Ali (Азхар)
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Export Goods- Money Comes Into the
Country
BY: Azhar. Ali (Азхар)
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Explanation
CURRENT ACCOUNT: The current account of BOP
consists of the receipts and payments against exports
and imports of goods, exports and imports of services
and unilateral transfer ( international grants, gifts etc).
In current account, merchandise exports are shown as a
positive item are recorded on F.O.B (free on board).
Which means that the cost of transportations, insurance
etc are excluded. On the other hand, imports are shown
as a negative item are recorded at C.I.F, which means
that cost, insurance and freight are included.
BY: Azhar. Ali (Азхар)
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Explanation
CAPITAL ACCOUNT: It is an account which shows
inflow & outflow of capital. In other words, the
capital account shows international flow of loans
and investments and represents a change in the
country’s foreign assets and liabilities.
OFFICAL RESERVE ACCOUNT: The items in the
official reserves account represents the “Foreign
Exchange” position of a country. It means that
this account shows that how much official
reserves it has to deal with the deficit or surplus
at the basic equilibrium in the BOP.
BY: Azhar. Ali (Азхар)
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Is BOP always in Equilibrium
BOP always balance means that the algebraic
sum of the net credit and debits balances of
current, capital and official reserves account
must be equal to ZERO,
BOP is written as
B= Rf - Pf
Where B represents the BOP
Rf receipts from foreigners
Pf payments made to foreigners
BY: Azhar. Ali (Азхар)
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Explanation
1. When
B= Rf – Pf = 0 , there the BOP is equilibrium
2. When Rf – Pf > 0, it is known surplus,
receipts from foreigners exceeds than
payments to foreigners
3. And when Rf – Pf < 0 there is deficit in the
BOP, as the payments made to foreigners
exceeds receipts from foreigners.
BY: Azhar. Ali (Азхар)
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Causes of Disequilibrium
1. TEMPORARY CHANGES or ( Disequilibrium)
There may a temporary changes in BOP by random
variation in trade, seasonal fluctuations, the effect of
weather on agriculture production etc. normally its occur
for a short period of time.
2. Fundamental Disequilibrium:
Fundamental disequilibrium refers to continuous and
long run BOP disequilibrium of a country. According to
IMF current Report it may cause to,
I. Changes in consumer tastes which effect imports or
exports
II. Excessive capital out flow
III. Low competitive strength in world market
IV. Inflationary pressure. BY: Azhar. Ali (Азхар)
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Causes of Disequilibrium
3. Structural Changes:
Such type of disequilibrium rises because of the
structural changes which occur in a country because
of,
I. increase in Population.
II. Restrictions of all kind imports.
III. Deficiency of resources.
4. Changes in Income.
5. Political conditions.
6. Stage of economic development: when economic
development is going on fast, the country needs
more and more machinery, equipment and
materials.
BY: Azhar. Ali (Азхар)
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Method for Correcting Disequilibrium
1.
a)
b)
c)
d)
e)
f)
Improving balance of Trade: the most important part of balance of
payment is usually the balance of trade. So steps are taken to
make it favorable. For this purpose, exports are encouraged and
imports are reduced. Export can be increased by:
Reducing export duties.
Granting concessions to export industries as lower taxes, cheaper
loan etc.
Decreasing prices of export items to make these cheaper for
foreigners.
Devaluation of currency so that our goods become cheaper for
others.
Improving quality of export products to make them competitive in
international markets.
Increasing production of exportable goods.
BY: Azhar. Ali (Азхар)
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Conti
2. Invisible export and import: A country can
increase invisible exports of services like
tourism, exporting labor or exporting software
programs. On the other hand foreign
exchange can be saved by reducing invisible
imports.
BY: Azhar. Ali (Азхар)
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End of Chapter
ANY QUESTION
?
BY: Azhar. Ali (Азхар)
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