Balance of payments is an accounting statement that provides a systematic record of all the economic transactions between residents of a country & the rest of the world in a given period of time. Here are the balance of payments class 12 notes.
Topics Discussed
Economic Transactions
It refers to those transactions which involve the transfer of title or ownership of goods, services, money & assets.
Economic transactions include:
- Visible Items: These include all types of physical goods which are exported & imported. These are called visible items because they are made of some material & can be seen, touched & measured.
- Invisible Items: Invisible items of trade refer to all types of services like banking, shipping, insurance, etc. which are given & received. These are called invisible items because they cannot be seen, touched & measured.
- Unilateral Transfers: It includes gifts, personal remittances & other one-way transactions. Since these transactions do not involve any claim for repayment, they are known as unrequited transfers.
- Capital Transfers: Capital transfers relate to capital receipts (borrowings, sale of assets) and capital payments(capital repayment or purchase of assets).
Structure of BOP
BOP accounting uses a double entry system like a business A/, BOP A/c also has 2 sides:
- Debit side(Dr.): All outflows or uses of foreign exchange are recorded on the debit side.
- Credit side(Cr.): All the inflows or sources of foreign exchange are recorded on the credit side.
In an economic sense, BOP need not to be always equal. It can be:
- Surplus BOP: BOP is surplus when receipts of foreign exchange are more than payments of foreign exchange.
- Deficit BOP: BOP is a deficit when receipts of foreign exchange are less than payments of foreign exchange.
- Balanced BOP: BOP is balanced when receipts of foreign exchange are equal to payments of foreign exchange.
Note: BOP is a flow concept as it is related to a given period of time.
Balance of Trade
Balance of trade refers to the difference between the amount of exports & imports of visible items(goods).
BOT= Exports of goods-Imports of goods
Exports are entered as credit(+ve) items, while imports are entered as debit(-ve) items.
BOT is just a part of BOP A/c & it is also known as a balance of visible trade and trade balance. Just like BOP, the balance of trade can be surplus or deficit.
Difference between BOP and BOT
| Basis | BOT | BOP |
| Meaning | BOT refers to the difference between the amount of exports & imports of visible items(goods). | BOP is an accounting statement that provides a systematic record of all the economic transactions between residents of a country & rest of the world in a given period of time. |
| Components | BOT includes only visible items. | BOP includes visible, invisible, unilateral & capital items. |
| Scope | It is a narrower concept as it is only a part of BOP A/c. | It is a wider concept as it includes BOT. |
| Settlement | Unfavorable BOT can be met out of favorable BOP. | Unfavorable BOP cannot be met out of favorable BOT. |
| Capital Transactions | It does not record any transaction of a capital nature. | It records all transactions of the capital nature. |
Components of BOP
The transactions of BOP can be grouped under 2 categories:
1) Current A/c
2) Capital A/c
Current A/c
Current A/c refers to an account that records all the transactions relating to export & import of goods & services & unilateral transfers during a given period of time.
Components of Current A/c
- Export & Import of Goods(Visible Trade): A major part of transactions in foreign trade is in the form of exports & imports of goods.
Payment for the import of goods is written on the negative side(Dr.), and items & receipts from exports are shown on the positive side(Cr.). - Export & Import of Services(Invisible Trade): It includes a variety of non-factor services sold & purchased by residents of a country to & from the rest of the world.
Services are generally of 3 kinds:
a) Shipping
b) Banking
c) Insurance
Payment of these services is recorded on the negative side & receipts on the positive side. - Unilateral Transfers to & from Abroad: These refer to those transactions that take place without any service in return. It includes gifts, donations, personal remittances & other one-way transactions.
Receipts of unilateral transfers from the rest of the world are shown on the credit side & unilateral transfers to the rest of the world on the debit side. - Income Receipts & Payments to & from Abroad: It includes investment income in the form of interest, rest & profits.
| Credit Item | Debit Item | Net Credit(Credit-Debit) |
| Export of Goods | Import of goods | Net export of goods |
| Export of Services | Import of services | Net export of services |
| Transfer Receipts | Transfer payment | Net transfer receipt |
| Income Receipts | Income payment | Net income receipts |
Capital A/c
Capital A/c of BOP records all those transactions between the residents of a country & the rest of the world which cause a change in the assets or liabilities of the residents of a country or its government.
Capital A/c is used:
- To finance the deficit in current A/c.
- To absorb the surplus of current A/c.
Foreign Exchange Rate Class 12 Notes
Components of Capital Account
Borrowings & Lengin to & from Abroad
It includes:
- All transactions related to borrowings from abroad by private sector, government, etc. Receipts of such loans & repayment of loans by foreigners are recorded on the credit(positive) side.
- All transactions of lending abroad by the private sector and government lending abroad & repayment of loans abroad are recorded as debit(negative) items.
Investments to & from Abroad
It includes:
- Investments by the rest of the world in shares of Indian companies, a real state in India, etc. Such investments from abroad are recorded on the positive(credit) side as they bring foreign exchange.
- Investments by Indian residents of foreign companies, real estate abroad, etc. Such investments abroad are recorded on the negative(debit) side as they lead to an outflow of foreign exchange.
Change in Foreign Exchange Reserves
The foreign exchange reserves are the financial assets of the government held in the central bank. Any withdrawal from reserves is recorded on the positive(credit) side & any addition to reserves is recorded on the negative(debit) side.
| Credit Items | Debit Side | Net Credit(Cr.-Dr.) |
| Borrowings from abroad | Lending to abroad | Net borrowings from abroad |
| Investments from abroad | Investment to abroad | Net investment from abroad |
| Decrease in foreign exchange reserves | Increase in foreign exchange reserves | Net change in foreign exchange reserves |
Difference between Current and Capital A/c
| Basis | Current A/c | Capital A/c |
| Meaning | Current A/c refers to an account that records all the transactions relating to the export & import of goods & services & unilateral transfers during a given period of time. | Capital A/c of BOP records all those transactions between the residents of a country & the rest of the world which causes a change in the assets or liabilities of the residents of a country or its government. |
| Component | Current A/c= Visible Items+Invisible Itmes+Unilateral Transfers+Income Receipts & Payments | Capital A/c= Borrowing & Lending from & to Abroad+Investments to & from Abroad+Change in Foreign Exchange Reserves |
| Concept | It is a flow concept as it includes all items of a flow nature. | It is a stock concept as it includes all times expressing changes in stock. |
| Influence on the Economy | These transactions bring a change in the current level of the country’s income. | Capital transactions bring about a change in the capital stock of a country. |
Difference between Autonomous and Accommodating Items
| Basis | Autonomous Items | Accommodating Items |
| Meaning | It refers to those international economic transactions that take place due to some economic motive such as profit maximization. | It refers to those transactions that are undertaken to cover deficit/surplus in the autonomous transactions. |
| Current/Capital A/c | Autonomous transactions take place on both current & capital A/c. | It takes place only on capital A/c. |
| Effect on BOP A/c | Autonomous transactions are independent of the state of BOP A/c. | They are undertaken to maintain the balance in BOP A/c. |
| Alternate name | These items are also known as above-the-line items. | These are also known as below-the-line items. |
| Example | On the current A/c, export & import of goods are autonomous transactions. On the capital A/c receipts & repayments of long-term loans by private individuals are autonomous transactions. | If there is a current A/c deficit in the BOP then this deficit is settled by capital inflow from abroad. |
Dis-equilibrium in the BOP
Disequilibrium in the BOP of a country may be either in the form of a deficit or in the form of a surplus.
A surplus does not pose much of a problem but a deficit creates difficult problems for the economy.
Deficit in BOP A/c arises when total inflows on A/c of autonomous transactions are less than total outflows on account of such transactions.