Balance of Payment

Balance of Payment
Meaning: ‘Balance of payment refers to an accounting statement that provides systematic record of all
economic transaction between residents of a country and rest of the world.’
Economic Transaction:
‘Economic transaction refers to those which transfer the ownership of goods and services and
capital.’
Categories of Economic Transaction
1) Visible items: Visible items refer to those which can not be touched and seen. These items
include all physical goods.
2) Invisible items: It refers to those which can not be touched and seen. These items include all
types of services.
3) Unilateral transfer: It refers to those where is no involve any claim for repayment. Unilateral
transfers include gifts, personal remittances and other one sided transactions.
4) Capital transfer: It refers to those which is related to capital receipts and payments. It include
borrowing and sale and purchase of assets.
Structure of Balance of Payment
It use double entry system. It has two sides credit side and debit side.
1) Credit side: All inflow and income are included in credit side.
2) Debit side: All outflow and payment are included in debit side.
Possibilities of BOP
1) Balanced balance of payment: When receipts are equals to payments, it is called balanced
balance of payment.
2) Surplus balance of payment: When receipts are more than payments, it is called surplus balance
of payment.
3) Deficit balance of payment: When receipt is less than payment, it is called deficit balance of
payment.
Causes of BOP
1) Economic factors:
a) Developmental activities
b) High rate of inflation
c) Cyclical fluctuation
2) Political factor:
a) Political instability
b) Political disturbance
3) Social factor:
a) Demonstration effect
b) Change in 0taste, preference, fashion and trend
Balance of Trade
‘Balance of trade refers to the difference between export and import of visible items.’
Possibilities of BOT
1) Balanced balance of trade: When export is equals to import, it is called balanced balance of
payment.
2) Surplus balance of trade: When export is more than import, it is called surplus balance of
payment.
3) Deficit balance of trade: When export is less than import, it is called deficit balance of payment.
Difference between Balance of Payment and Balance of Trade
Balance of Payment (BOP) Balance of Trade (BOT)

1) Meaning: ‘Balance of payment refers to 1) Meaning: ‘Balance of trade refers to the
an accounting statement that provides difference between export and import of
systematic record of all economic visible items.’
transaction between residents of a
country and rest of the world.’
2) BOP include all transaction i.e. visible 2) BOT include only invisible items.
items, invisible items, unilateral transfer,
capital transfer.
3) BOP is wider concept. 3) BOT is narrow concept.
4) Favourable BOP can adjust unfavourable 4) Favourable BOT can not adjust
BOT. unfavourable BOP.
Components of Balance of Payment
Balance of payment can be grouped under two broad categories. 1) current account and 2) capital
account.
Current Account:
‘Current account refers to an account which records all the transactions related to export and import
of visible and invisible items and unilateral transfers.’
Components of Current Account
1) Export and import of visible items

2) Export and import of invisible items
3) Unilateral transfer (One-sided transaction)
4) Income receipts and payments.
Capital Account
‘Capital account of BOP refers to those which record the transactions related to asset and liabilities.’
Components of Capital Account
1) Borrowing and lending

2) Investment
3) Change in foreign exchange reserves.
Difference Between Current Account and Balance of Trade
Current Account Balance of Trade

Meaning: ‘Current account refers to an account Meaning: ‘Balance of trade refers to the
which records all the transactions related to difference between export and import of visible
export and import of visible and invisible items items.’
and unilateral transfers.’
Current account of BOP include all transaction i.e. BOT include only invisible items.
visible items, invisible items, unilateral transfer.
It is wider concept It is narrow concept
Difference Between Capital Account and Balance of Trade
Capital Account Balance of Trade

Meaning: ‘Capital account of BOP refers to those Meaning: ‘Balance of trade refers to the
which record the transactions related to asset difference between export and import of visible
and liabilities.’ items.’
Capital account include borrowing and lending, BOT include only invisible items.
investment, change in foreign exchange reserves.
It is wider concept It is narrow concept.
Difference Between Current Account and Capital Account
Current Account Capital Account

Meaning: ‘Current account refers to an account Meaning: ‘Capital account of BOP refers to those
which records all the transactions related to which record the transactions related to asset
export and import of visible and invisible items and liabilities.’
and unilateral transfers.’
Component: Current account = Visible items + Components: Capital account = Borrowing and
invisible items + Unilateral transfer + income lending + Investment + Change in foreign
receipts and payment. exchange reserves.
It is flow concept. It is stock concept.
Difference Between Autonomous Items and Accommodating Items
Basis Autonomous Items Accommodating items

Meaning Autonomous items refers to those Accommodating items refers to the
international economic transactions transactions that are undertaken to cover
which take place due to some profit autonomous items.
motive.
Current Autonomous transactions take place Accommodating transactions take place only
/Capital on both current account and capital on capital account.
account account.
Alternate These items are also known as ‘above These items are also known as ‘below the
Name the line items’. line items’.

Balance of Payment

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Balance of Payment

Categories of Economic Transaction

Structure of Balance of Payment

Difference between Balance of Payment and Balance of Trade

Balance of Payment (BOP) Balance of Trade (BOT)

3) BOP is wider concept. 3) BOT is narrow concept.

Components of Current Account

1) Export and import of visible items

Components of Capital Account

1) Borrowing and lending

Difference Between Current Account and Balance of Trade

Current Account Balance of Trade

It is wider concept It is narrow concept

Difference Between Capital Account and Balance of Trade

Capital Account Balance of Trade

It is wider concept It is narrow concept.

Difference Between Current Account and Capital Account

Current Account Capital Account

Difference Between Autonomous Items and Accommodating Items

Basis Autonomous Items Accommodating items

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