Balance of Payment,

FDI And FPI

Definition - Balance of Payment

A Balance of Payment account is a statement of double
entry system of record of all economic transactions
(involving foreign payments) between residents of a
country and the rest of the world carried out in specific
period of time.

TERMINOLOGIES
Favorable Balance Of Payments Value of total receipts
more than total payments
Adverse Balance Of Payments Value of total receipts less
than total payments
Balanced Balance Of Payments Value of total receipts
equals total payments
Unrequited receipts Receipts for which nothing has to be
paid in return.
Unrequited payments Payments for which nothing is
received in return.

Balance of Trade
Definition: Difference between value of exports and imports of
visible items only

BOT

BOP

R e c o r d s o n l y m e r c h a n d i s e Records transactions
transactions
both goods and services

relating to

Does not record transactions of Records transaction of capital nature

capital nature
A part of current account of BOP

Includes BOT , Balance of services ,

Balance Of Unrequited Transfers and
Balance Of Capital Transactions.

BALANCE OF PAYMENT ACCOUNTS

CURRENT ACCOUNT
All transactions relating to goods, services and
unrequited transfers constitute current account
Flow of items pertaining to specific period of
time
Visible items include
goods
Invisible items include
services

Structure of current account

Transactions

Credit

Debit

Net Balance

Merchandise

Export

Import

2. Foreign Travel

Earning

Payment

3. Transportation

Earning

Payment

4. Insurance
(Premium)

Receipt

Payment

5. Investment Income

Dividend Receipt

Dividend Payment

6.Government
(purchase of goods &
services)

Receipt

Payment

Surplus (+)

CURRENT A/C
Balance

Deficit (-)

CAPITAL ACCOUNT
All transactions indicating changes in stock magnitudes
concerning capital receipts and payments constitute
capital account
Relates to
- Borrowing
- Capital repayment
- Sale of assets
- Change in stock of gold
- Change in reserve of foreign currency

Short term capital movement includes:

Purchase of short term securities
Speculative purchase of foreign currency
Cash balances held by foreigners
Net balance of current account

Long term capital movement includes:

Investments in shares, bonds, physical assets etc.
Amortization of capital

DIFFERENCE BETWEEN CURRENT

ACCOUNT AND CAPITAL ACCOUNT

CURRENT ACCOUNT

CAPITAL ACCOUNT

Indicates flow aspect of Indicates changes in stock

c o u n t r y s n a t i o n a l magnitudes
transactions
Relates to all transactions
Relates to goods , services constituting debts and transfer
and unrequited transfers
of ownership

STRUCTURE OF BALANCE OF
PAYMENTS ACCOUNT
CREDITS

DEBITS

Current A/c:

Current A/c:

Exports of goods (Visible items)

Imports of goods(Visible items)

Exports of services (Invisibles)

Imports of services(Invisibles)

Unrequited receipts (gifts , remittances, Unrequited payments( gifts, remittance,

indemnities, etc. form foreigners)
indemnities etc. to foreigners)
Capital A/c:

Capital A/c:

Capital receipts (Borrowings from

abroad , capital repayments by , or sale
of assets to foreigners, increase in stock
of gold and reserves of foreign currency
etc.)

Capital payments (lending to , capital

repayments to , or purchase of assets
from foreigners, reduction in stock of
gold and reserves of foreign currency
etc.)

Total Receipts

Total Payments

An Example
Let us consider the following hypothetical situation:

Export of goods Rs. 550 Crore

Import of goods Rs. 650 Crore
Export of services Rs. 150 Crore
Import of services Rs. 70 Crore
Unrequited receipts Rs. 100 Crore
Unrequited payments Rs. 80 Crore
Capital receipts Rs. 200 Crore
Capital payments Rs. 200 Crore.

Balance Of Payment Account

Credits

Debits

Current A/c:
1)Export of goods 550
2)Export of services 150
3)Unrequited receipts 100

Current A/c:
1)Import of goods 650
2)Import of services 70
3)Unrequited payments 80

Capital A/c:
1)Capital receipts

Capital A/c:
1)Capital payments 200

Total receipts

200
1000

Total payments

1000

EQUILIBRIUM IN BOP
ACCOUNTS
Total receipts equals total payments arising out of
transfer of
Goods and services
Other transactions
These transactions are classified as: Autonomous transactions
Induced transactions or Accommodating capital
flows

 In the current account autonomous transactions are

the export and import of goods and services
When export is not equal to import, short run capital
movements such as international borrowing and
lending take place, which are called induced or
accommodating transactions

 In the capital account the export and import of long

term capital are autonomous transactions
The short term capital movements viz. gold
movements and accommodating capital movements
on account of autonomous transactions are induced
transactions.

Example of Autonomous and Accommodating

transactions
Credits
Current A/c

Debits
Current A/c

Autonomous transactions

Autonomous transactions

1. Export of goods 550

2. Export of services 150
3. Unrequited receipts
Gifts
75
Indemnity
25
Capital A/c

1. Import of goods 800

2. Import of services 50
3. Unrequited payments
Gifts
20
Remittance
60
Capital A/c

Accommodating transactions

Accommodating transactions

1. Borrowings
Receipts

1. Lending
Payments

200
1000

70
1000

Disequilibrium
Total receipts and total payments inequality shows
disequilibrium of balance of payments account
Total receipt and payment arising from autonomous
transactions determine the deficit or surplus in the
balance of payments
If payments > receipts, BOP shows Deficit
If payments < receipts, BOP shows Surplus

CAUSES OF
DISEQUILIBRIUM
Increase in imports
Slow progress in exports
Burden of interest payments
International developments
Deficit in capital account

Corrective Measures

Devaluation
Export promotion
Import restrictions
Import substitution
Government intervention
Supply of credit
Special treatment to NRIs
Announcement of trade policies
Foreign aid
Improvements in production efficiency