12. balance of payment
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Balance of Payments
Balance of Payment Balance of Trade & Balance of Payment are concepts related to
International Trade Balance of Trade is a record of goods or merchandise i.e.
Includes only visible items Balance of Payment is a comprehensive record of all transactions
of a country with other countries during a given year i.e. Includes both visible & invisible items – goods & services
Prof Kindleberger; BOP is the systematic record of all economic transactions between the residents of the reporting country & residents of foreign countries
Structure of BOP It has two sides i.e. Payments & Receipts
Structure of BOP BOP is broadly classified in 3 accounts i.e. Current A/C,
Capital A/C & Reserve A/C First 4 items are of Current A/C i.e. records of export &
import of goods & services & unilateral transfers Unilateral Transfers refer ti items that have no correspinding
receipt or payment i.e. Donations, Remittances, Gifts etc. Capital A/C is category 5 & 6 Reserve A/C is category no. 7 it is maintained by Central
bank in terms of gold, foreign currencies
Difference between BOT & BOP
Disequilibrium in BOP Disequilibrium in BOP can be of 2 types i.e. Either
Surplus or Deficit Surplus BOP is when receipts are more than
payment and in Deficit when payments are more than receipts
Disequilibrium in BOP can be explained in 2 terms i.e. Autonomous & Accommodative Transactions
Disequilibrium in BOP Autonomous Transactions - A transaction undertaken in
normal course of Business. Includes all Exports & Imports of goods & services. Transactions are profit motivated. It does NOT take into A/C the equilibrium aspect of BoP – Termed as Above the line transactions
Accommodative Transactions - Transaction undertaken with the specific intention of adjusting the imbalance arising out of other transactions. Not profit oriented – Termed as below the line transactions
Causes of Disequilibrium Development
Projects Trade Cycles Growth in Population Demonstration Effect Trade barriers
Capital Transactions Technological
Advancement Inflation Political Instability Lack of Co-operation
Types of Disequilibrium Cyclical Disequilibrium
Prosperity, Recession, Depression & Recovery Structural Disequilibrium
Change in Taste, Technological advancement, war or natural calamities etc.
Short Run Disequilibrium 1 – 2 years – failure of monsoon, industrial strike etc.
Long Run Disequilibrium Fundamental disequilibrium – change in population, hike in oil
prices, increase in imports
Methods to Correct Disequilibrium
Monetary Methods Non-Monetary Deflation Exchange Depreciation – 1$
= 50 then 1$ = 60 Devaluation Exchange Control –
restrictions on the usage of forex – to have strict imports
Tariffs Quotas Export Promotion Import
Substitution
Questions 1. Explain BoP & its structure 2. Short Note – Distinguish between BOT & BoP 3. Explain Disequilibrium in BoP & its types 4. Throw light on the causes of disequilibrium of
BoP5. Explain Monetary Method to correct
Disequilibrium 6. Explain Non - Monetary Method to correct
Disequilibrium