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BALANCE OF PAYMENTS

BALANCE OF TRADE

Submitted By:-
Vivek Prashar(19129)
Sahibaan Singh (19130)
Infrastructure Management
BALANCE OF PAYMENTS
INTRODUCTION
The balance of payments is a statistical record of all the flow
of payments between residents of one country and the rest of
the world.
A country's balance of payments tells you whether it saves
enough to pay for its imports.
The BOP is reported for a quarter or a year.
A BOP deficit means the country imports more goods,
services and capital than it exports. It must borrow from
other countries to pay for its imports. In the short-term, that
fuels the country's economic growth. It's like taking out a
school loan to pay for education.Your expected higher future
salary is worth the investment.
A BOP surplus means the country exports more than it
imports. Its government and residents are savers. They
provide enough capital to pay for all domestic production.
They might even lend outside the country.
COMPONENTS OF BOP
The balance of payments (BOP) is composed of three distinct
account:
The Current account.
The Capital Account.
The Official International Reserves.
THE CURRENT ACCOUNT
It is an statistical record of the trade in goods and services between
a country and the rest of the world.
It consists of the goods balance, the service balance, the income
balance, and the unilateral transfer balance.
Goods Balance: (the trade balance) it is a record of trade in goods.
Service Balance: it is a record of all trade in services.
Income Balance: it is a record of all investment income, the flow
of earnings from the different forms of direct and portfolio
investments made in prior periods.
Unilateral Transfer Balance: it is a record of net transfer payments
from abroad with no corresponding flow of goods and services
(goodwill).
THE CAPITAL ACCOUNT
The capital account is a statistical record of investment flows
between a country and the rest of the world.
The capital account records transactions that result from
nonfinancial and financial assets.
For example, it records international transfers of drilling
rights, trademarks and copyrights
OFFICIAL INTERNATIONAL RESERVES
The net results of the activities in the current account and the
capital account must be financed by changes in official
monetary reserves.
These accounts reflect changes in reserve assets (gold,
foreign currencies, deposits, securities), use of credit and
loans from the IMF (SDRs), liabilities constituting foreign
authorities' reserves (changes in private bank liabilities that
are held as foreign exchange reserves by central banks of
other countries, and exceptional financing.
ACCOUNTING RULE
Transactions with the rest of the world that earn foreign
exchange are recorded in the balance of payments statistics as
a credit (+).
Transactions with the rest of the world that expend foreign
exchange are recorded in the balance of payments statistics as
a debit (-)
International Capital Flows
Capital flows across countries are typically classified in terms of maturity
(short-term versus long-term) and whether the investment represent some
form of control over the target investment (portfolio versus direct).
Short-term Capital Flows: Short-term debt instruments (e.g., U.S. Treasury
bill) have offered relatively high real rates of return at low levels of risk for
investor worldwide.
Long-term Capital Flows: is typically attracted to economic and business
environments expected to provide significant long-run stability and economic
growth.
Portfolio Investment:a transaction in which securities are held purely as a
financial investment.
Direct Investment: a transaction in which the investor has a controlling share or
participates in the management of the firm. The cut-off level of ownership
beyond which an investment is classified as direct investment varies across
countries, but is usually around 10 %.
Capital Flight:
It is generally a rapid and sometimes illegal transfer of
currencies out of a country. It is mainly of 5 primary types:
Transfers via the international payments mechanisms. These
are just regular bank transfers.
Transfer of physical currency by the bearer. This cash
smuggling activity is usually illegal.
Transfer of cash into collectibles or precious metals.
Cross-border purchase of foreign assets that are managed to
hide movement of money and ownership (Money
Laundering).
False invoicing of international trade transactions
Balance Of Trade
Defination
The balance of trade compares the value of a
country's exports of goods and services against its imports.
The balance of trade is the most significant component of
the current account.
Favorable Trade Balance

Countries consider a surplus a favorable trade balance


because it's like making a profit as a country.
To maintain this favorable trade balance, leaders often resort
to trade protectionism.
They protect domestic industries by levying tariffs, quotas
or subsidies on imports.
Unfavorable Trade Balance

Countries with trade deficits export raw materials. They


import a lot of consumer products.
Their domestic businesses don't gain the experience needed
to make value-added products.
Balance of Trade vs. Balance of
Payments
The balance of trade is one component of the balance of
payments. The balance of payments also
measures international investments and net income made on
those investments.
Why Indias Balance of Trade is
unfavorable?
India has been incurring high expenses on Petroleum Bill. In
2006-07, Indias oil import bill was about US $ 48 billion.
Indias crude oil import bill is expected to increase 23% from
$70 billion in 2016-17 to $86 billion in 2017-18 considering
Indian basket crude oil price of $55 a barrel and rupee-dollar
exchange rate of 65 for the balance part of the financial year
Examples
There are countries where it is almost certain that a trade
deficit will occur. For example, the United States has had a
trade deficit since 1976, in large part due to its imports of oil
and consumer products
China, a country that produces and exports many of the
world's consumable goods, has recorded a trade surplus since
1995.
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