Balance of payments

“The balance of payment is a statistical statement for a

given period showing
a) Transaction in goods and services and income
between an economy and the rest of the world
b) Changes of ownership and other changes in that
country’s monetary gold, SDRs and claims and
liabilities to the rest of the world ,and
c) Unrequited transfers and counterpart entries that
are needed to balance, in the accounting sense,
any entries for the foregoing transactions and
changes which are not mutually offsetting.”
- The IMF publication, “Balance of
Payments Manual.”
Components of BoP
 Current account: - Merchandise exports and imports
- Invisible exports and Imports
 Capital account: - Short-term
- Long term
 Unilateral Transfer Account: - Gifts

- Remittances
 Official reserves account:- Gold

-convertible foreign exchange

Balance of payment disequilibrium
 either a surplus
 or a deficit
Factors causing Disequilibrium
1]. Economic factors
Development disequilibrium
Cyclical disequilibrium Lawrence W. Towle “Depression always brings
about a drastic shrinkage in world trade, while prosperity stimulates it.”
Secular disequilibrium
Structural disequilibrium
2]. Political factors
political instability
wars
change in world trade routes
3]. Social factors
changes in tastes preferences, fashion, etc.
 Correction of Disequilibrium

Deliberate Measures
Automatic Corrections

Monetary Trade measures Miscellaneous

measures measures
1) Monetary 1. Foreign loans
contraction /
2. Incentives for
expansions
foreign investments
2) Devaluation/
3. Tourism
Revaluation
development
3) Exchange control
4. Incentives for
Export Promotion Import control inward remittances
1. Abolition of export 1. Import duties 5. Import substitutions
duties
2. Import quota
2. Export subsidies
3. Import
3. Incentives prohibition