Balance of Payment.

BOP is a statement of systematic records

of all economic transaction between one
country and rest of the world.

Characteristics of BOP.
It is an international record.
It is usually for a period of one year.
It lists all receipt & payment of the
international transaction of a country.
It has two sides viz. debit and credit.

BOP statement.
BOP composed of capital account and current
account.
Capital Account :- It is concerned with the
payment of the countrys debit as well as its
claims.
Current Account :- It consists of trade account
or merchandise or goods that are exported or
imported.

Balance of Trade.
BOT is one component of BOP.
BOT consists of visible items alone.
It is calculated on day to day basis.
It is a narrow concept.

Disequilibrium in BOP.
Cyclic Disequilibrium :- It occurs due to the
problem of business cycles. At the time of
prosperity or boom.

Secular Disequilibrium :- It occurs due to

excessive investment and technological
changes. Population also affects on it.

Continued
Structural Disequilibrium :- It occurs when
there is a change in the demand or supply
position of exports and imports between two
different countries.
Temporary Disequilibrium :- It may be caused
for a short period of time. Certain conditions
like change in political stability or flood,
drought condition, war condition etc..

Continued..
Fundament Disequilibrium :- This is caused
when the country is continuously under an
unfavourable balance of payments.

Causes of Disequilibrium.
BOP

NATURAL

ECONOMIC

POLITICAL

SOCIAL

SECULAR

Natural factors.
Natural calamities such as chronic poor
weather condition like droughts or excessive
rainfall may adversely affect production.
Other factors may be depleting natural
resources like forest ,soil, petroleum or loss of
water bodies etc.
Extreme situations there is considerable inflow
of aid in short run but in long run devastation
may cause disequilibrium.

Economic Factors.
Development Imports :- development
programs involve large-scale imports of capital
goods without the nation being able to export.
Cyclical disequilibrium :- A cyclical
fluctuation in the business activity is one of the
prominent reasons of disequilibrium.

Continued.
Inflation :- In the home country leads to a rise
in the price of domestic goods and hence
export prices rise and import will appear more
attractive.
Capital Movement :- large-scale capital
movement can cause massive outflows and
create disequilibrium in BOP.

Political factors
Ineffeciency :- Speculation linked with this is
normally leads to outflow of funds and capital
in search of safer haven.
Instability :- It adversely affect productivity
level as it often delays policy formation or
timely action.
War :- war with neighboring country or
elsewhere can have repercussion on home
country.

Social factors.
Demonstration effect :- with increasing
demonstration global pattern of demand is
converging towards the consumption patterns
of the western economics.
Cultural trends :- age structure influences the
consumption pattern, this creates a many
products demanded by youth and influences
the pattern of imports.

Secular factors.
Population :- underdeveloped countries are
like to experience a persistent growth in the
population because of it leads to high demand
for goods and services that have to be
imported.
Age structure :- capital formation leads to
high import of capital machinery and other
inputs .The dependence on the foreign imports
tends to become chronic.

Automatic Measures
Under the Gold Standard :- Disequilibrium
was corrected through the inflow & outflow of
gold.
Under the System of Flexible Exchange
Rates:- It is determined by demand and supply
factors of foreign exchange.

Monetary measures.
Credit Control :-The government may resort to
credit control that is quantitative control or
qualitative control, objective is to lower the
price and make export attractive.
Credit contraction, useful mainly if the
economy is facing inflation.
Higher interest rates ,it may attract
investment from abroad.

Monetary measures
Exchange Control :- This is popular method
employed by govt. to influence BOP, under
this govt. or central bank assumes control over
foreign exchange reserves & earnings of the
country.
Currency Devaluation :- It is similar to
currency depreciation, lowering the external
value of currency as a part of exchange rate
policy.

Trade Measures.
Export Promotion :- Objective is to increase
the inflow of foreign exchange and reduce the
outflow.
Reduction in the duties on export.
Provision of export subsidies.
Import Control Measures :-Import Duties are
levied on good that are imported.
Control over import quotas.

Miscellaneous Measures.
Tourism.
Remittance.
Inflows of the capital account :Foreign direct investment.
Foreign loans.