Balance Of Payment

Balance Of Payment

Importance of BOP

What is BOP ? What is BOT ? Is BOP=BOT ?

BOP Accounts

Current Account

Current Account

Capital Account

Capital Account

Statistical Discrepancies

Official Reserves to IMF

BOP Identity

Balance Of Payment

Country A:
Imports Widget

Country B: Exports Widgets

Exchanges CurrencySells own Currency To buy Country Bs Currency to Pay for Widget Creates a supply of Country As currency Causing value to Decrease Creates Demand for Country Bs Currency Causing value to Increase

Disequilibrium in BOP
A countrys balance of payments is in

disequilibrium when there is no perfect equality between the demand and supply for foreign exchange.
Disequilibrium may take place either in the form

of deficit or in the form of surplus.

Types of Disequilibrium in BOP

Structural Disequilibrium Cyclical disequilibrium Technological Disequilibrium

Short run Disequilibrium

Long run or Secular Disequilibrium Monetary Disequilibrium

Causes of Disequilibrium in BOP

Population Growth
Development Programs Demonstration Effects Natural Factors Cyclical Fluctuations Inflation Poor Marketing Strategies

Flight of Capital
Globalization

Monetary Measures for Correcting the BOP

1. Deflation
2. Exchange Depreciation 3. Devaluation

4. Exchange Control

Non-Monetary Measures for Correcting the BOP

1. Tariffs
2. Quotas

3. Export Promotion
4. Import Substitution

Limitations of BOP
Sources of information used to prepare BOP statement

are varied namely central bank, institutions linked with external trade such as EXIM Bank, custom authorities etc.
A perfect coherence among these sources may not be

possible.
Thus the account Errors and Omissions serves to bring

about an equilibrium between economic operations and their monetary counterparts.

Limitations of BOP
BOP statement is established in terms of transaction

i.e. it takes into account transactions rather than settlements.

BOP is expressed in national currency. But often the

operations have been done in other currencies. This causes the problem of exchange gain or loss, which is ignored. Countries like Japan prepare BOP in two currencies i.e. Yen and USD.

GOLD STANDARD

What is Gold Standard??

A Monetary system of a countrys government

which allowed to fix prices of its domestic currency in terms of a specified amount of gold.
Eg. $100 = 1 ounce of gold

then, $1 = 1/100 th of an ounce of gold

History of Gold
Gold was used as standard in 643 B.C. to

create coinage.
Wealth = amount of gold a person holds. Slowly the use of gold as money evolved, from

coins to paper redeemable by coins, to a concept that was loosely tied to its value in gold.

Origin
Gold standard was mainly used during the period of

1875 to 1914.(inter war period as well)

After World War II, a modified version of the gold

standard monetary system, the Bretton Woods monetary system created as its successor.

This successor system was initially successful, but

because it also depended heavily on gold reserves, it was abandoned in 1971 when U.S President Nixon "closed the gold window."

Types of Gold Standard

Gold Specie Standard: the monetary unit is

associated with circulating gold coins, or with the unit of value defined in terms of one particular circulating gold coin in conjunction with subsidiary coinage made from a lesser valuable metal.
Gold Bullion Standard: a system in which gold coins

do not circulate, but in which the authorities have agreed to sell gold bullion on demand at a fixed price in exchange for the circulating currency.

Bimetallism
A combination of Gold and Silver standard

is called as Bimetallism.
Silver standard was used in United States in

1800s.
U.S. had bimetallism both gold and silver

standard.

Pros and Cons

PROS: low level of inflation Stability in Foreign Exchange Market CONS: Stability Very little scope for using monetary policy Results: contributed for the Great Depression of 1929 exchange rates did not respond in sync with circumstances in countries

Recent Times
Fiat Money- means money that is

intrinsically useless; is used as a medium of exchange.

Then why does money have value??? value of money is determined by the Supply and demand for goods and services in the economy The prices for goods and services are allowed to fluctuate based on Market Forces.

What is International Liquidity?

International liquidity is the part of the concept of

international finance. International liquidity is foreign currency or gold in the reserve of any country. At micro level, you can understand international liquidity as cash in your pocket for operation of business.

 The concept of international liquidity is

associated with international payments. It refers to the generally accepted official means of settling imbalances in international payments. international liquidity comprises two elements, viz., owned reserves and borrowing facilities.

Source of Liquidity
Broadly, they can be classified into two categories:
Owned resources. Borrowing facilities.

What are the Problems of International Liquidity?

The problem of international liquidity has two aspects:
Quantitative

Qualitative

ADEQUACY OF LIQUIDITY

Causes of Inadequacy of International Liquidity

total gold reserves have grown since 1950 at 1.4 per

cent per year; and total international liquidity at 2.7 per cent per year, on the other hand, the world trade has since 1950 grown at the annual rate of 7.5 per cent per year.
2.Distribution of liquidity among the various

countries of the world is also very uneven. Some countries have too much liquidity, -whereas others have too little

Causes of Inadequacy of International Liquidity

The supply of goldone of the major components of

liquidityis very much limited and also cannot be increased according to the needs.

IMF AND INTERNATIONAL LIQUIDITY

The IMF is alive to the problem of shortage of

international liquidity. Within the framework provided by its Articles, it is making all efforts to increasing the supply of international liquidity. The measures-taken in this direction are; (a)increase in quotas. (b) allocation of SDRs. And (c) introduction of new lending facilities and expansion of existing facilities.

IMF AND INTERNATIONAL LIQUIDITY

International Liquidity is a wider concept than

international reserves. It means resources available to individual countries to meet their balance of payments deficits. In this context, various issues are considered such as sources of liquidity, adequacy, IMF role and criticisms. The SDRs role and uses, valuation and allocation of SDRs are highly related, in international liquidity

SPECIAL DRAWING RIGHTS

SDR

What Are SDRs ?

The SDR is an international reserve asset, created by the

IMF in 1969.
SDRs are allocated to member countries in proportion to

their IMF quotas.

As on March 2011 amount of SDR was 238.3 billion.

Why SDRs?
To support the Bretton Woods fixed exchange

rate system. The dominant constituents of international reserves are:

1.Government or central bank holdings of gold 2.Widely accepted foreign currencies (USD)
Inadequacy of these two key reserve assets,led

to creation of a new international reserve asset under the auspices of the IMF.

SDR Valuation
The value of the SDR initially defined as 0.888671 grams

of fine gold = one U.S. dollar.

After the collapse of the Bretton Woods system in1973,

SDR was redefined as a basket of currencies

Basket consists of:

Euro Pound sterling

Japanese yen U.S. dollar

The U.S. dollar-value of the SDR is posted daily on the

IMF's website.

SDR Valuation (Cond)

It is calculated as the sum of specific amounts of the four basket

currencies valued in U.S. dollars, on the basis of exchange rates quoted at noon each day in the London market.

In the most recent review (in November 2010), the weights of the currencies in the SDR basket were revised based on the value of the exports of goods and services and the amount of reserves denominated in the respective currencies that were held by other members of the IMF.

The basket composition is reviewed every five years by the Executive

Board

THURSDAY AUGUST 02,2012 RATES

CURRENCY EURO JAPANESE YEN POUND STERLING U.S.DOLLAR Currency amount under Rule O-1 0.4230 12.1000 0.1110 0.6600 Exchange rate 1 1.22710 78.22000 1.55500 1.00000 U.S. dollar equivalent 0.519063 0.154692 0.172605 0.660000

1.506360
U.S.$1.00 = SDR SDR1 = US$ 0.663852 1.50636

SDR Interest Rate

The SDR interest rate provides the basis for calculating:

Interest charged to members on regular (non-

concessional)IMF loans Interest paid and charged to members on their SDR holdings and charged on their SDR allocations. The SDR interest rate is determined weekly. Is based on a weighted average of representative interest rates on short-term debt in the money markets of the SDR basket currencies.

July 23 to July 29
currency Currency amount under rule 0-1 A 0.4230 12.1000 0.1110 0.6600 Exchange rate against the SDR B 0.810239 0.0084334 1.04268 0.66413 Interest rate Product C (A*B*C)

EURO JAPANESE YEN U.K.POUND STERLING US DOLLAR

-0.0020 0.1000 0.2700 0.0900 TOTAL

-0.0007 0.0102 0.0312 0.0394 0.0801

SDR Allocation to IMF Members

Allocation of SDR is based on the proportion IMF

quotas of the members. If a member's SDR holdings rise above its allocation, it earns interest on the excess If it holds fewer SDRs than allocated, it pays interest on the shortfall.

Kinds Of Allocation
General Allocations Special Allocations

Recent Figures
GENERAL ALLOCATION UNITED STATES 27539.1 SPECIAL ALLOCATION 2877.0 TOTAL

30416.2

GERMANY

9643.1

1205.3

10848.4

CHINA
RUSSIA INDIA

5997.3
4407.4 3082.5

755.6
1264.4 214.6

6752.9
5671.8 3297.1

BUYING AND SELLING OF SDR

IMF acts as an intermediary between members and

prescribed holders to ensure that SDRs can be exchanged for freely usable currencies.
For more than two decades, the SDR market has functioned

through voluntary trading arrangements

In the event that there is insufficient capacity under the

voluntary trading arrangements, the Fund can activate the designation mechanism