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Understanding Balance of Payments in International Business

This article explores the concept of balance of payments in international business, including its components, such as current account, capital account, and unilateral transfer account. It also discusses the factors that can lead to a deficit or surplus in the balance of payments.

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Understanding Balance of Payments in International Business

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  1. INTERNATIONAL BUSINESSCode: cp-105unit – 2mba I semster Compiled by: Dr. Rishi Sharma IBE/ CP - 105/ UNIT- 2/ SIRT-E/ DR. Rishi Sharma

  2. Topic: BALANCE OF PAYMENTS IBE/ CP - 105/ UNIT- 2/ SIRT-E/ DR. Rishi Sharma

  3. BALANCE OF PAYMENTS It includes: All receipts of goods exported. All services rendered by the country. Capital received by residents of the country. Payment made by the residents due to good imported and services received from. Capital transferred to NRI/forigners. IBE/ CP - 105/ UNIT- 2/ SIRT-E/ DR. Rishi Sharma It is a double entry system of record of all transactions between the residents of a country and the rest of the world carried out in a specific period of time.

  4. BALANCE OF TRADE & BALANCE OF PAYMENTS Balance of payment includes all visible and non visible items; hence it is a much wider concept. IBE/ CP - 105/ UNIT- 2/ SIRT-E/ DR. Rishi Sharma Balance of trade takes into account only the merchandise export and import of visible items. Intangible items like services (banking, insurance, transport etc.), dividend payment, interest payment etc. are not included.

  5. CURRENT ACCOUNT CAPITAL ACCOUNT BALANCE OF PAYMENTS UNITLATERAL TRANFER ACCOUNT OFFICIAL SETTLEMENT ACCOUNT IBE/ CP - 105/ UNIT- 2/ SIRT-E/ DR. Rishi Sharma Components

  6. CURRENT ACCOUNT: • Includes all visible exports and imports. • Other invisible items like receipts and payments for various service like insurance, tourism etc. BALANCE OF PAYMENTS DEBIT 1. Merchandise Import 2. Invisible Import CREDIT 1. Merchandise Export 2. Invisible Export IBE/ CP - 105/ UNIT- 2/ SIRT-E/ DR. Rishi Sharma Components

  7. Invisible import and export means the import-export of travel, transportation, insurance, investment income, govt. income not included elsewhere, miscellaneous(receipts and payments for patents and royalties), transfer payments official and transfer payments private. BALANCE OF PAYMENTS IBE/ CP - 105/ UNIT- 2/ SIRT-E/ DR. Rishi Sharma Items in invisible export and import

  8. Liberalization which leads to import of goods. Increase in consumer demand (Even high export growth rate could not compensate this) Devaluation of rupees against the dollar. Heavy import of capital goods due to fast economic growth. Rapid industrialization. BALANCE OF PAYMENTS IBE/ CP - 105/ UNIT- 2/ SIRT-E/ DR. Rishi Sharma Few reasons of deficit in current account

  9. PRIVATE CAPITAL: • LONG TERM CAPITAL: • all capital invested for more than one year. • Includes FDI and FII. • Long term loans. • Foreign currency deposits. • Unclassified receipts • 2. SHORT TERM CAPITAL: which is invested for less than one year. BANKING CAPITAL: External financial assets and liabilities of commercial and co- operative banks allowed to deal in foreign exchange. BALANCE OF PAYMENTS IBE/ CP - 105/ UNIT- 2/ SIRT-E/ DR. Rishi Sharma OFFICIAL CAPITAL: It is the capital hold by RBI in term of Foreign Capital. CAPITAL ACCOUNT

  10. Capital outflow from home country to foreign country is treated as debit and inflow of capital from foreign country is in credit side. Eg: Reliance industries invested Rs. 1 billion in the Kingdom of Saudi Arabia, Debit of our capital account and credit in the accounts of Kingdom of Saudi Arabia. BALANCE OF PAYMENTS IBE/ CP - 105/ UNIT- 2/ SIRT-E/ DR. Rishi Sharma CAPITAL ACCOUNT

  11. Unilateral transfer are ‘giving the gifts.’ It includes government grants, relief and AID etc. Eg: India’s grant to Nepal for it’s flood Tradegy. Debit of India’s BOP and credit of Uganda's BOP. BALANCE OF PAYMENTS • CREDIT SIDE: • Private remittance (payments) received from abroad. • Pension • Government grants from abroad. IBE/ CP - 105/ UNIT- 2/ SIRT-E/ DR. Rishi Sharma • DEBIT SIDE: • Private remittance (payments) to abroad. • Grants to abroad. UNILATERAL TRANFER ACCOUNT (UTA)

  12. BALANCE OF PAYMENTS REPRESENTS: Official sale of Foreign Currency and other reserves to Foreign countries or official purchase or other reserves from foreign country. Credits: Money received from official sale of foreign currencies and reserves. IBE/ CP - 105/ UNIT- 2/ SIRT-E/ DR. Rishi Sharma Debits: Payment done for official purchase of foreign currencies and reserves. OFFICIAL SETTLEMENT ACCOUNT

  13. BALANCE OF PAYMENTS DEMAND OF FOREIGN CURRENCY SUPPLY OF FOREIGN CURRENCY EQUAL IBE/ CP - 105/ UNIT- 2/ SIRT-E/ DR. Rishi Sharma EQUILIBRIUM

  14. BALANCE OF PAYMENTS DEMAND OF FOREIGN CURRENCY SUPPLY OF FOREIGN CURRENCY SUPPLY OF FOREIGN CURRENCY DEMAND OF FOREIGN CURRENCY IBE/ CP - 105/ UNIT- 2/ SIRT-E/ DR. Rishi Sharma DISEQUILIBRIUM NEGETIVE POSITIVE

  15. BALANCE OF PAYMENTS Development activities like establishment of industries, roads bridges, power plants etc. ECONOMIC FACTORS 1 Development Disequilibrium Increase of capital goods and Import of consumer goods increases. Income of people, aggregate demand, prices increases. IBE/ CP - 105/ UNIT- 2/ SIRT-E/ DR. Rishi Sharma CAUSES OF DISEQUILIBRIUM

  16. BALANCE OF PAYMENTS ECONOMIC FACTORS Boom in the business activities in one country increases consumption, aggregate demand and prices more than production. 2 Cyclical Disequilibrium Depression leads to the increases of export; shifting the demand to another country. Boom and depression causes disequilibrium conditions. IBE/ CP - 105/ UNIT- 2/ SIRT-E/ DR. Rishi Sharma CAUSES OF DISEQUILIBRIUM

  17. BALANCE OF PAYMENTS ECONOMIC FACTORS Result of increase in import due to high disposable income; high aggregate demand. 3 Secular Disequilibrium Developed countries prefer to import goods from other countries where goods are produced at lower cost of production. IBE/ CP - 105/ UNIT- 2/ SIRT-E/ DR. Rishi Sharma CAUSES OF DISEQUILIBRIUM

  18. BALANCE OF PAYMENTS Changes in the economy includes shifts from agriculture to service, development of alternative source of supply, exhaustion of productive resource, changes in transport channel and cost. ECONOMIC FACTORS 4 Structural Disequilibrium IBE/ CP - 105/ UNIT- 2/ SIRT-E/ DR. Rishi Sharma Structural changes leads to import of capital goods and consumer goods of the changed structure. CAUSES OF DISEQUILIBRIUM

  19. BALANCE OF PAYMENTS POLITICAL FACTORS • Political uncertainties, instability, internal disturbances, war etc. • Creates threats to industry and investment. • Contributes to outflow of capital. • Decline of domestic production; hence import of goods. • Eg: Sri Lanka, Pakistan etc. IBE/ CP - 105/ UNIT- 2/ SIRT-E/ DR. Rishi Sharma CAUSES OF DISEQUILIBRIUM

  20. BALANCE OF PAYMENTS SOCIAL FACTORS • Drop out from existing culture. • Changes in taste, fashion and preferences of people. • CONTRIBUTES TO THE INCREASE IN IMPORTS AND DEFICIT IN BOP. IBE/ CP - 105/ UNIT- 2/ SIRT-E/ DR. Rishi Sharma CAUSES OF DISEQUILIBRIUM

  21. BALANCE OF PAYMENTS • Automatic Correction: • Deficit indicates demand of foreign currency is higher and supply is less. • Corrects automatically as the value of currency fluctuates. • Deliberate Measures: • Govt. efforts to correct/ control deficit in BOP. Includes monetary, trade and miscellaneous measures. IBE/ CP - 105/ UNIT- 2/ SIRT-E/ DR. Rishi Sharma METHODS OF CORRECTION OF DISEQUILIBRIUM

  22. BALANCE OF PAYMENTS • Monetary Measures: • A) Reduction in Money Supply: CRR (Cash Reserve Ratio) etc. will help in reducing money supply in the country. The result is decline in income, purchasing power, aggregate demand and consumption which further result in more export as domestic demand is less means positive BOP. • B) Devaluation of currency: Results in discouragement to imports and encouragement to export. • C) Exchange control: Prior permission is required for imports. IBE/ CP - 105/ UNIT- 2/ SIRT-E/ DR. Rishi Sharma METHODS OF CORRECTION OF DISEQUILIBRIUM

  23. BALANCE OF PAYMENTS • Trade Measures: • A) Export promotional measures: Abolishing export duties, export subsidies, encouragement of export oriented units (EOUs), Creation of export, Export Processing Zones (EPZs) , Free Trade Zones (FTZs), liberal loans for export oriented units, fiscal incentives, marketing incentives and facilities. • B) Import Control Measures: Import duties, import quotas, import license, prohibiting import of certain items, increase in customs duty on import etc. • c) Miscellaneous Measures: Loan in foreign currencies, attracting FDI, development of tourism, attracting NRI deposits etc. IBE/ CP - 105/ UNIT- 2/ SIRT-E/ DR. Rishi Sharma METHODS OF CORRECTION OF DISEQUILIBRIUM

  24. BALANCE OF PAYMENTS • 1. Import Control: Reducing the dependency on foreign countries for different items like; food grains, cloth, paper, steel edible oils fertilizers etc. • Export Promotion: Encouragement of export of engineering goods, handicrafts, technology etc. • Attracting FDI. • Liberalizing exchange rate : Based upon market forces. • Liberalized export policy to encourage export. IBE/ CP - 105/ UNIT- 2/ SIRT-E/ DR. Rishi Sharma INDIA’s EFFORTS TO MAINTAIN BOP POSITION

  25. Thank You IBE/ CP - 105/ UNIT- 2/ SIRT-E/ DR. Rishi Sharma

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