BALANCE OF PAYMENT

FROM ROW TO ROW

FOREX (+) FOREX (-)

CREDIT (RECEIPTS) DEBITS (PAYMENTS)

EXPORTS OF GOODS IMPORTS OF GOODS
(VISIBLE ITEMS)

EXPORTS OF SERVICES (INVISIBLE ITEMS) IMPORTS OF SERVICES

UNILATERAL TRANSFER RECEIPTS UNILATERAL TRANSFER PAYMENTS

(GIFTS,DONATIONS)

CAPITAL RECEIPTS (A- , L+) CAPITAL PAYMENTS

(A+ , L-)

BOP ACCOUNT IS A SYSTEMATIC ACCOUNT OF ALL THE ECONOMIC TRANSACTIONS BETWEEN

RESIDENTS OF AN ECONOMY AND RESIDENTS OF ROW FOR A SPECIFIED PERIOD OF TIME
 CREDIT (RECEIPTS) DEBITS (PAYMENTS)
EXPORTS OF GOODS BALANCE OF TRADE (1-1)
IMPORTS OF GOODS
1. (VISIBLE ITEMS)

EXPORTS OF SERVICES IMPORTS OF SERVICES

BALANCE OF SERVICES
2.
(INVISIBLE ITEMS)
(2-2)

3.
UNILATERAL TRANSFER RECEIPTS UNILATERAL TRANSFER PAYMENTS BALANCE OF TRANSFER
(GIFTS,DONATIONS) (3-3)
4. CAPITAL RECEIPTS CAPITAL PAYMENTS
CAPITAL ACCOUNT (4-4)
 CREDIT (RECEIPTS) DEBITS (PAYMENTS)

1. EXPORTS OF GOODS IMPORTS OF GOODS

(VISIBLE ITEMS)

2. EXPORTS OF SERVICES IMPORTS OF SERVICES

CURRENT
(INVISIBLE ITEMS)
ACCOUNT (1+2+3
UNILATERAL TRANSFER RECEIPTS UNILATERAL TRANSFER PAYMENTS
3. – 1+2+3)
(GIFTS,DONATIONS)

4. CAPITAL RECEIPTS (A- , L+) CAPITAL PAYMENTS (A+ , L-) CAPITAL

ACCOUNT (4-4)
CURRENT ACCOUNT SURPLUS

>
EXPORTS OF GOODS IMPORTS OF GOODS

EXPORTS OF SERVICES IMPORTS OF SERVICES

UNILATERAL TRANSFER RECEIPTS UNILATERAL TRANSFER PAYMENTS

CAS is a broader concept than Trade surplus.

CAS signifies that the nation is a lender to the rest of the world.

CURRENT ACCOUNT DEFICIT

<
EXPORTS OF GOODS IMPORTS OF GOODS

EXPORTS OF SERVICES IMPORTS OF SERVICES

UNILATERAL TRANSFER RECEIPTS UNILATERAL TRANSFER PAYMENTS

CAD is a broader concept than Trade deficit.

CAD signifies that the nation is a borrower from the ROW.
 BOT BOP
IT IS THE DIFFERENCE BETWEEN THE VALUE IT IS A SYSTEMATIC ACCOUNT OF ALL THE
OF EXPORTS AND IMPORTS OF GOODS. ECONOMIS TRANSACTIONS BETWEEN
RESIDENTS OF AN ECONOMY AND ROW.

IT RECORDS ONLY GOODS OR MERCHANDISE IT RECORDS BOTH GOODS AND SERVICES.

ONLY.

IT DOES NOT RECORD ITEMS OF IT RECORDS ITEMS OF CAPITAL

CAPITAL NATURE. NATURE.

IT IS A PART OF CURRENT ACCOUNT OF IT COMPRISES BOT, BALANCE OF

BOP. SERVICES,BALANCE OF T/F AND BALANCE OF
CAPITAL ACCOUNT.

IT MAY BE FAVORABLE, UNFAVORABLE OF IT ALWAYS REMAINS IN EQUILIBRIUM

IN EQUILIBRIUM.
 CURRENT ACCOUNT
THAT ACCOUNT OF BOP WHICH RECORDS IMPORTS AND EXPORTS OF
GOODS, SERVICES AND TRANSFERS.
IT RELATES TO THOSE TRANSACTIONS WHICH DO NOT ALTER THE
VALUES OF FIXED ASSESTS AND LONG TERM LIABILITIES.

COMPONENTS OF CURRENT ACCOUNT

EXPORTS AND IMPORTS OF GOODS.

SERVICES RENDERED AND RECEIVED.

UNILATERAL TRANSFERS
 CURRENT ACCOUNT CAPITAL ACCOUNT
IT RECORDS ALL THE TRANSACTIONS
IT RECORDS ALL THE TRANSACTIONS
WHICH RECORD EXPORT AND IMPORT OF
WHICH AFFECT THE ASSETS AND
GOODS,SERVICES AND TRANSFER
LIABILITIES.
RECEIPTS AND PAYMENTS.

RECURRING IN NATURE. NON RECURRING IN NATURE.

NET INCOME GENERATED FROM NON-RECURRING SO IT CANNOT BE

THEFOREIGN. CALLED INCOME.

DEFICIT OF CURRENT ACC IS MET BY DEFICIT OF CAP ACC IS NOT MET BY

THE SURPLUS OF CAPITAL ACC. THE SURPLUS OF CURRENT ACC.
COMPONENTS OF CAPITAL ACCOUNT
THE CAPITAL ACCOUNT OF BOP RECORDS ALL SUCH TRANSACTIONS WHICH
RELATES TO CHANGE IN FIXED ASSESTS AND LIABILITIES OF A COUNTRY.
PRIVATE TRANSACTIONS TRANSACTIONS AFFECTING ASSESTS AND LIABILITIES.
BY INDIVIDUAL OR BUSINESS ENITITIES

OFFICIAL TRANSACTIONS TRANSACTIONS AFFECTING ASSESTS AND LIABILITIES.

BY GOVERENMENT OR ITS AGENCIES.

FOREIGN DIRECT INVESTMENT IT MEANS PURChASING AN ASSET IN THE OTHER COUNTRY. AND
GETTING THE CONTROL OVER ASSET.

PORTFOLIO INVESTMENT IT REFERS TO PURCHASing AN ASSET IN THE OTHER COUNTRY. WITHOUT

GETTING THE CONTROL OVER ASSETS.

OTHER COMPONENTS
BORROWINGS AND LENDINGS TO INVESTMENTS TO AND FROM ABROAD. (FDI AND CHANGES IN FOREX RESERVES.
& FROM ABROAD. PORTFOLIO INVESTMENT).
 AUTONOMOUS ITEMS ACCOMMODATING ITEMS
INTERNATIONAL ECONOMIC TRANSACTIONS TRANSACTIONS WHICH ARE UNDERTAKEN TO
THAT TAKE PLACE DUE TO ECONOMIC MOTIVE MAINTAIN THE BOP IN EQUILIBRIUM. (FOR EX
LIKE PROFIT MAXIMIZATION. (FOR EX BORROWINGS TO MEET THE DEFICIT IN
EXPORTS). AUTONOMOUS TRANSACTIONS.)

THESE ARE CALLED ABOVE THE LINE THESE ARE CALLED BELOW THE LINE
ITEMS. ITEMS.

THESE ITEMS COULD BE A PART OF CURRENT THESE ITEMS ARE A PART OF CAPITAL
ACCOUNT OR CAPITAL ACCOUNT. ACCOUNT ONLY.

THESE ARE NOT DEPENDENT ON BOP. THESE ARE DEPENDENT ON BOP.

FOREIGN
EXCHANGE
 FOREIGN EXCHANGE
REFERS TO ALL THE CURRENCIES OTHER THAN DOMESTIC CURRENCY

FOREIGN EXCHANGE RATE

THE RATE AT WHICH CURRENCY OF ONE ECONOMY CAN BE EXCHANGED WITH THE CURRENCY OF ANOTHER ECONOMY

FOR EG: ONE US DOLLAR CAN BE EXCHANGED WITH 7O INDIAN RUPEES

1 $ = Rs. 70

FOREIGN EXCHANGE MARKET

THE MARKET IN WHICH EXCHANGE OR TRADE OF FOREIGN CURRENCY TAKE PLACE

TYPES OF FOREIGN EXCHANGE RATE

FIXED (PEGGED) EXCHANGE RATE:

RATE OF FOREIGN EXCHANGE DECIDED BY GOVERNMENT SUCH A RATE IS NOT AFFECTED

BY THE CHANGES IN DEMAND AND SUPLY OF FOREIGN CURRENCY ONLY GOVT. CAN CHANGE IT

FLEXIBLE (FLOATING) EXCHANGE RATE

RATE OF FOREIGN EXCHANGE IS DETERMINED BY MARKET FORCES OF DEMAND AND SUPPLY OF FOREIGN CURRENCY
GOVERNMENT CANNOT CHANGE IT

MANAGED FLOATING RATE

IT IS LIKE FLOATING RATE BUT IT IS MANAGED BY RBI DIRTY FLOATING

RBI INFLUENCES THE RATE BY INCREASING/DECREASING THE SUPPLY OF FOREX)

INCREASES THE SUPPLY OF FOREX BULK SELLER

DECREASE THE SUPPLY OF FOREX BULK BUYER
SOURCES OF DEMAND OF FOREIGN EXCHANGE
TO PURCHASE GOODS AND SERVICES FROM FOREIGN COUNTRIES (IMPORTS)

TO PURCHASE FINANCIAL ASSETS (SHARES AND DEBENTURES) IN FOREIGN COUNTRY

TO INVEST IN PHYSICAL ASSETS OF FOREIGN COUNTRIES

TO UNDERTAKE TOURS ABROAD

TO SEND GIFTS ABROAD TO SPECULATE IN FOREIGN CURRENCY

Y D

DOWNWARD
FOREX SLOPING
RATE
D
O X
DD OF FOREX
INVERSE RELATIONSHIP BETWEEN PRICE OF FOREIGN EXCHANGE (FOREIGN EXCHANGE RATE) & DEMAND OF FOREX
SOURCES OF SUPPLY OF FOREIGN EXCHANGE

WHEN FOREIGNERS PURCHASE INDIA’S GOODS AND SERVICES EXPORTS

WHEN FOREIGNERS INVEST IN FINANCIAL ASSET OF INDIA

WHEN INDIAN WORKERS WORKING ABROAD SEND THEIR SAVINGS TO INDIA REMITTANCES

WHEN FOREIGN TOURISTS COME TO INDIA

Y S

FOREX UPWARD
RATE SLOPING

S
O X
SS OF FOREX

DIRECT RELATIONSHIP BETWEEN PRICE OFFOREIGN EXCHANGE (FOREIGN EXCHANGE RATE) SUPPY OF FOREX
DETERMINATION OF FOREIGN EXCHANGE RATE IN A FLOATING MARKET

RATE OF FOREIGN EXCHANGE IS DETERMINED TTHROUGH THE MARKET FORCES OF DEMAND AND SUPPLY OF
FOREIGN EXCHANGE
Y
D

DEMAND OF FOREIGN EXCHANGE DOWNWARD

FOREX SLOPING
RATE

D
O X
DD OF FOREX
Y S
SUPPLY OF FOREIGN EXCHANGE

FOREX UPWARD
RATE SLOPING

S
O X
SS OF FOREX
DETERMINATION OF FOREIGN EXCHANGE RATE

Y
D
S

E OP = FOREX RATE
P
FOREX
RATE
S D

O DD/SS OF X
FOREX
EFFECT OF INCREASE IN DEMAND OF FOERX ON EQUILIBRIUM EXCHANGE RATE
Y D’
D S D C (RIGHTWARD SHIFT)
P’
P E
D’ EQ. FOREX RATE
D
S

O Q X
EFFECT OF DECREASE IN DEMAND OF FOREX ON EQUILIBRIUM EXCHANGE RATE
Y D S
D’ D (LEFTWARD SHIFT)
P E
P’
D EQ. FOREX RATE
S
D’
O Q X
EFFECT OF INCREASE IN SUPPLY OF FOREX ON EQUILIBRIUM EXCHANGE RATE
Y
D S S’

P S C (RIGHTWARD SHIFT)
E
P’
D
S EQ. FOREX RATE
S’

O Q X

EFFECT OF DECREASE IN SUPPLY OF FOREX ON EQUILIBRIUM EXCHANGE RATE

Y S’
D S
P’

P E
S’
D
S

O Q X
SPOT MARKET
IF THE OPERATION IS OF DAILY NATURE, IT IS CALLED SPOT MARKET AND THE RATE WHICH PREVAILS IN SPOT MARKET IS
CALLED SPOT RATE. IT IS ALSO CALLED CURRENT RATE OF EXCHANGE

FORWARD MARKET
A MARKET IN WHICH FOREIGN EXCHANGE IS BOUGHT OR SOLD FOR FUTURE DELIVERY IS KNOWN AS FORWARD MARKET AT A
RATE AGREED TODAY. THE RATE PREVAILING IN THIS MARKET IS CALLED FORWARD RATE.
IN OTHER WORDS, FORWARD RATE IS THE RATE AT WHICH THE FUTURE CONTRACT FOR FOREIGN CURRENCY IS MADE.
 1$ = Rs 50
1$ = Rs 60

OR

FLEXIBLE/
FLOATING FOREX APPRECIATION OR DOMESTIC DEPRECIATION
CURRENCY

FIXED DEVALUATION
REVALUATION
MARKET
 1$ = Rs 50
1$ = Rs 40

OR

FLEXIBLE/
FLOATING FOREX DEPRECIATION OR DOMESTIC APPRECIATION
CURRENCY

FIXED
MARKET DEVALUATION REVALUATION
 FLEXIBLE EXCHANGE RATE

VALUE (+) VALUE (-)

APPRECIATION DEPRECIATION

APPRECIATION INCREASE IN THE VALUE OF CURRENCY IN TERMS OF ANOTHER CURRENCY IN FLEXIBLE EXCHANGE RATE
SYSTEM

DEPRECIATION FALL IN THE VALUE OF CURRENCY IN TERMS OF ANOTHER CURRENCY UNDER FLEXIBLE EXCHANGE
RATE SYSTEM
 FIXED EXCHANGE RATE

VALUE (+) VALUE (-)

REVALUATION DEVALUATION

REVALUATION RISE IN THE VALUE OF CURRENCY IN TERMS OF ANOTHER CURRENCY DELIBERATELY

BY THE GOVT. UNDER

DEVALUATION FALL IN THE VALUE OF CURRENCY IN TERMS OF ANOTHER CURRENCY
FIXED
CHANGE
EFFECT OF DEPRECIATION OF DOMESTIC CURRENCY ON EXPORTS AND IMPORTS

EFFECT OF DEVALUATION OF DOMESTIC CURRENCY ON EXPORTS AND IMPORTS

EFFECT OF APPRECIATION OF FOREIGN CURRENCY ON EXPORTS AND IMPORTS
EFFECT OF REVALUATION OF FOREIGN CURRENCY ON EXPORTS AND IMPORTS

EFFECT ON IMPORTS THINK FROM 1$ = Rs 50

BUYER’S POINT OF 1$ = Rs 60
VIEW

ONE iPHONE = $ 1000 COST OF ONE iPHONE FOR INDIAN USER

BEFORE DEPRECIATION OF DOMESTIC CURRENCY 𝟏𝟏𝟏𝟏𝟏𝟏𝟏𝟏 × 𝟓𝟓𝟓𝟓 = 𝐑𝐑𝐑𝐑. 𝟓𝟓𝟓𝟓, 𝟎𝟎𝟎𝟎𝟎𝟎

AFTER DEPRECIATION of DOMESTIC CURRENCY 𝟏𝟏𝟏𝟏𝟏𝟏𝟏𝟏 × 𝟔𝟔𝟔𝟔 = 𝐑𝐑𝐑𝐑. 𝟔𝟔𝟔𝟔, 𝟎𝟎𝟎𝟎𝟎𝟎

iPHONE HAS BECOME COSTLIER FOR INDIAN BUYER DEMAND OF iPHONE IMPORT WILL REDUCE
EFFECT OF DEPRECIATION OF DOMESTIC CURRENCY ON EXPORTS AND IMPORTS

EFFECT OF DEVALUATION OF DOMESTIC CURRENCY ON EXPORTS AND IMPORTS

EFFECT OF APPRECIATION OF FOREIGN CURRENCY ON EXPORTS AND IMPORTS
EFFECT OF REVALUATION OF FOREIGN CURRENCY ON EXPORTS AND IMPORTS

EFFECT ON EXPORTS THINK FROM 1$ = Rs 50

BUYER’S POINT OF 1$ = Rs 60
VIEW

IN INDIA PRICE OF 1 CHOCOLATE = Rs 10 BEFORE DEPRECIATION AFTER DEPRECIATION

FOREIGNER COULD BUY NO OF CHOCOLATE BY SPENDING $1 5 6

FOR FOREIGNERS INDIAN GOODS ARE CHEAPER THEY WILL BUY MORE

SALES OF INDIAN GOODS EXPORTS

EFFECT OF APPRECIATION OF DOMESTIC CURRENCY ON EXPORTS AND IMPORTS

EFFECT OF REVALUATION OF DOMESTIC CURRENCY ON EXPORTS AND IMPORTS

EFFECT OF DEPRECIATION OF FOREIGN CURRENCY ON EXPORTS AND IMPORTS

EFFECT OF DEVALUATION OF FOREIGN CURRENCY ON EXPORTS AND IMPORTS

1$ = Rs 50
1$ = Rs 40

EFFECT ON IMPORTS EFFECT ON EXPORTS

5 CHOCOLATE BEFORE APPRECIATION
$ CHEAPER
4 CHOCOLATE AFTER APPREACTION
iPHONE CHEAPER
CHOCOLATE COSTLIER

iPHONE CHOCOLATE
IMPORT EXPORT
DEMAND SALE
WHY DEMAND CURVE OF FOREIGN EXCHANGE IS DOWNWARD SLOPING?
OR
WHY MORE OF FOREIGN EXCHANGE IS DEMANDED AT LOWER FOREIGN EXCHANGE RATE?
OR
WHY THERE IS AN INVERSE RELATIONSHIP BETWEEN DEMAND OF FOREIGN EXCHANGE AND FOREIGN EXCHANGE RATE?

PRICE OF FOREIGN EXCHANGE DEMAND OF FOREX 1$ = Rs 50

(FOREX RATE) 1$ = Rs 40

U.S. GOODS U.S. GOODS

CHEAPER DEMAND A. FOREIGN FINANCIAL ASSET
Y D CHEAPER.
E B. FOREIGN TOURS CHEAPER.
P C. FOREIGN GOODS CHEAPER.
PRICE OF FOREX

E’ D. FOREIGN MACHINES
P’ CHEAPER

D
O Q X
Q’
DEMAND OF FOREX
WHY SUPPLY CURVE OF FOREIGN EXCHANGE IS UPWARD SLOPING?
OR
WHY MORE OF FOREIGN EXCHANGE IS SUPPLIED AT HIGHER FOREIGN EXCHANGE RATE?
OR
WHY THERE IS A DIRECT RELATIONSHIP BETWEEN SUPPLY OF FOREIGN EXCHANGE AND FOREIGN EXCHANGE RATE?

FOREX RATE SUPPLY OF FOREX 1$ = Rs 50

1$ = Rs 40

INDIAN GOODS SALES OF

COSTLIER FOR INDIAN GOODS
Y FOREIGNER
S
P
PRICE OF FOREX

E’ E
P’

S
O X
Q’ Q SUPPLY OF FOREX