Understanding Balance of Payments and its Components

1. Unit - 4 International Trade

2. Balance of Payment The balance of payments is a consolidated account of the receipts and payments from and to other countries arising out of all economic transactions during the course of a year. Balance of payments refers to the recording of all economic transactions of a given country with rest of the world. Each country has got to enter into economic transactions with other countries of the world. As a result of such transactions, it receives payments to other countries. Balance of Payments is a statement of accounts of these receipts and payments.

3. Definition According to Kindleberger “The balance of payments of a country is a systematic record of all economic transactions between its residents and residents of foreign countries.” According to Benham “Balance of payments of a country is record of the monetary transactions over a period of time with the rest of the world”.

4. Features of Balance of Payments Systematic Record Fixed Period of Time Comprehensiveness Double entry System Adjustment of Differences All Items-Government and Non-Government.

5. Components of BOP Accounts The Current Account The Capital Account Statistical Discrepancy Errors and Omi­ssions The Official Reserve Account

6. Causes of unfavourable balance of payment of India Import of Machinery Import of War equipments Price disequilibrium Expenditure on Embassies Foreign Competition Increase in price of Crude Oil Payments of interest on foreign Debts Less growth in Exports Gulf War Disintegration of USSR

7. Measures to correct disequilibrium in the Balance of Payments Promotion of Exports Increase in Production Trade Agreements Encouragement to Foreign Investment Attraction to Foreign Tourists Devaluation of Indian Currency Deflation Restriction on Imports Import Substitution