Balance of Payments: Kapil Chaudhary Dmhs

Balance of Payments
kapil chaudhary
dmhs
Balance of Payments
Accounting
Records of
transactions among
nations have not
always been kept.
Are they very recent?
Balance of Payments Accounting
 What kinds of transactions represent the

basic focus of balance of payments
accounting?
 All transactions between the citizens of a

nation and those of other nations are
recorded in the balance of payments for a
given period of time.
Recording International Payments
 How is information recorded in balance of

payments accounting?
 The basic technique is standard, double-entry

accounting,
 a flow of funds statement that shows changes

in assets, liabilities and net worth over time.
Recording International Payments
 The balance of payments statement

is to inform government authorities of
the international position of the country
to assist them with monetary-fiscal
questions as well as trade and
payments policies.
Debits, Credits, and International Payments
 What is the meaning of a debit in a

balance of payments account?
 A debit records a transaction increasing

assets or reducing liabilities.
 A debit results from some kind of

transaction requiring an immediate out-
payment.
 A debit arises from the purchase of goods,
claims, or reserve assets and represents
an inflow of value.
 What is the meaning of a credit in a

balance of payments account?
 A credit records a transaction reducing
assets or increasing liabilities.
 It results from some kind of transaction
requiring an immediate inflow-payment.
 A credit arises from the sale of goods,
claims, or reserve assets and represents an
outflow of value.
Sources and Uses of Funds
 How does a country derive foreign
currencies it needs to conduct its
international business?
 The sources of funds, the supply of foreign

exchange, are
 exports,
 investment income,
 The sources of funds, the supply of
foreign exchange, are
 transfer payments received,

 and long-term and short-term
borrowing.
 Credit entries reflect the sources, debit

entries indicate the uses of foreign exchange.
Balance of Payments
 CURRENT ACCOUNT BALANCES
+
 CAPITAL ACCOUNT BALANCES
CURRENT ACCOUNT BALANCE
These accounts are to summarize payments a

country receives from other nations and payments
it must make to other nations.
1. MERCHANDISE OR TRADE BALANCE(BOT):

2. SERVICES BALANCE:
3. UNILATERAL TRANSFERS
1. MERCHANDISE OR TRADE BALANCE: (BOT)
Trade in goods includes items such as:

Manufactured goods
Semi-finished goods and components
Energy products
Raw Materials
Consumer goods
(i) Durable goods e.g. DVD recorder and new cars
(ii) Non-durable goods e.g. foods and beverages
Capital goods (e.g. new plant and equipment)
2. SERVICES
Trade in services includes:
Banking, insurance and consultancy services
Other financial services including foreign exchange and
derivatives trading
Tourism industry
Transport and shipping
Education and health services
Services associated with research and development
Cultural arts
(Gifts)
 government transfers to foreigners
 (E.g., Foreign aid or wheat from stockpiles)
 Private remittances of wages earned abroad
 interest payments, profits and dividends from
external assets located outside the country.
CAPITAL ACCOUNT BALANCE
CHANGES IN FOREIGN HOLDINGS OF Govt. ASSETS
Flows of financial assets and similar claims,
Foreign direct and other investments in the
country,
“Private capital flows.”
(Note that we are talking direct and portfolio investments here).
NET OFFICIAL INTERNATIONAL RESERVE TRANSACTION
Foreign official holdings of Indian assets,
Indian holdings of official reserve
(gold and foreign exchange) assets
“Official asset flows.”
All Together Now
1. MERCHANDISE OR TRADE BALANCE:
2. GOODS AND SERVICES BALANCE:
4.CHANGES IN FOREIGN HOLDINGS OF
INDIAN ASSETS
5.OFFICIAL INTERNATIONAL RESERVE
TRANSACTION
Overall Surpluses and Deficits
 What is an overall balance of payments
surplus?
 What is an overall deficit?

 India currently has a huge current
account deficit.
Why do we have it?
Is it sustainable?

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Balance of Payments

 What kinds of transactions represent the

 All transactions between the citizens of a

 How is information recorded in balance of

 The basic technique is standard, double-entry

 a flow of funds statement that shows changes

 The balance of payments statement

 What is the meaning of a debit in a

 A debit records a transaction increasing

 A debit results from some kind of

 What is the meaning of a credit in a

 The sources of funds, the supply of foreign

 transfer payments received,

 Credit entries reflect the sources, debit

These accounts are to summarize payments a

1. MERCHANDISE OR TRADE BALANCE(BOT):

Trade in goods includes items such as:

 What is an overall deficit?

Why do we have it?

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