Types of BOP

Types of Balance of Payment

The balance of payment is divided into three types:

Current account: This account scans all the incoming and outgoing of goods and services between countries. All
the payments made for raw materials and constructed goods are covered under this account. Few other deliveries that
are included in this category are from tourism, engineering, stocks, business services, transportation, and royalties
from licenses and copyrights. All these combine together to make a BOP of a country.

Capital account: Capital transactions like purchase and sale of assets (non-financial) like lands and properties are
monitored under this account. This account also records the flow of taxes, acquisition, and sale of fixed assets by
immigrants moving into the different country. The shortage or excess in the current account is governed by the
finance from the capital account and vice versa.

Finance account: The funds that flow to and from the other countries through investments like real estate, foreign
direct investments, business enterprises, etc., is recorded in this account. This account calculates the foreign
proprietor of domestic assets and domestic proprietor of foreign assets, and analyses if it is acquiring or selling more
assets like stocks, gold, equity, etc.
 Disequilibrium of BOP

A disequilibrium in the balance of payment means its condition of Surplus or deficit

• A Surplus in the BOP occurs when Total Receipts exceeds Total Payments. Thus, BOP= CREDIT>DEBIT
• A Deficit in the BOP occurs when Total Payments exceeds Total Receipts. Thus, BOP= CREDIT<DEBIT
 DISEQUILIBRIUM IN THE BALANCE OF PAYMENTS

1.Population Growth
like India and China the population is not only their Most countries experience an increase in the population and in
some needs, imports become essential and the quantity of imports may increase as population increases.

2. Development Programmes
Developing countries which have embarked upon planned development programmes require to import capital goods,
some raw materials which are not available at home and highly skilled and specialized manpower. Since development
is a continuous process, imports of these items continue for the long time landing these countries in a balance of
payment deficit.

3. Demonstration Effect
When the people in the less developed countries imitate the consumption pattern of the people in the developed
countries, their import will increase. Their export may remain constant or decline causing disequilibrium in the balance
of payments.
 DISEQUILIBRIUM IN THE BALANCE OF PAYMENTS

4. Natural Factors
Natural calamities such as the failure of rains or the coming floods may easily cause disequilibrium in the balance of
payments by adversely affecting agriculture and industrial production in the country. The exports may decline while the
imports may go up causing a discrepancy in the country's balance of payments.

5. Inflation
An increase in income and price level owing to rapid economic development in developing countries, will increase
imports and reduce exports causing a deficit in balance of payments.
 DISEQUILIBRIUM IN THE BALANCE OF PAYMENTS

6. Poor Marketing Strategies

The superior marketing of the developed countries have increased their surplus. The poor marketing facilities of the
developing countries have pushed them into huge deficits.

7. Flight Of Capital
Due to speculative reasons, countries may lose foreign exchange or gold stocks People in developing countries may
also shift their capital to developed countries to safeguard against political uncertainties. These capital movements
adversely affect the balance of payments position.

8. Globalisation
Due to globalisation there has been more liberal and open atmosphere for international movement of goods, services
and capital. Competition has beer increased due to the globalisation of international economic relations. The
emerging new global economic order has brought in certain problems for some countries which have resulted in the
balance of payments disequilibrium.
 MEASURES FOR DISEQUILIBRIUM IN THE BALANCE OF PAYMENTS

Monetary Measures :
a) Monetary Policy:- The monetary policy is concerned with money supply and credit in the economy. The Central
Bank may expand or contract the money supply in the economy through appropriate measures which will affect the
prices.

b) Fiscal Policy:- Fiscal policy is government's policy on income and expenditure. Government incurs development and
non - development expenditure,. It gets income through taxation and non - tax sources. Depending upon the situation
governments expenditure may be increased or decreased.

c) Exchange Rate Depreciation:- By reducing the value of the domestic currency, government can correct the
disequilibrium in the BOP in the economy. Exchange rate depreciation reduces the value of home currency in relation to
foreign currency. As a result, import becomes costlier and export become cheaper. It also leads to inflationary trends in
the country .

d) Devaluation:- devaluation is lowering the exchange value of the official currency. When a country devalues its
currency, exports becomes cheaper and imports become expensive which causes a reduction in the BOP deficit.
 MEASURES FOR DISEQUILIBRIUM IN THE BALANCE OF PAYMENTS

e) Deflation:- Deflation is the reduction in the quantity of money to reduce prices and incomes. In the domestic market,
when the currency is deflated, there is a decrease in the income of the people. This puts curb on consumption and
government can increase exports and earn more foreign exchange.
f) Exchange Control:- All exporters are directed by the monetary authority to surrender their foreign exchange earnings,
and the total available foreign exchange is rationed among the licensed importers. The license-holder can import any
good but amount if fixed by monetary authority.