Meaning
Balance of Payment is an accounting statement which shows all the transactions between a normal resident of a country and the rest of the world in a given period of time.
ECONOMIC TRANSACTION
Economic transactions are those transactions which involves transfer of title or ownership of goods, services money and assets.
These are of following types-
1. Visible items- this includes all the physical goods which are imported and exported these items can be seen and touched.
2. Invisible items- this includes all the services which are given or received like banking insurance warehousing, etc. this cannot be seen or touched but their presence can be felt out of benefits derived out of it.
3. Unilateral transfer- unilateral transfers are one-sided transactions which include gifts, grants, scholarship, etc.
4. Capital transfers- capital transfers relate to Capital receipt through borrowing sales of assets and capital payments through capital repayments purchase of an asset.
STRUCTURE OF BALANCE OF PAYMENT
Balance of payment account follows the double-entry system as hence have two sides that are debit side and credit side.
a. Debit side- all the payments made are recorded on the debit side of the balance of payment account.
b. Credit side- all the payments received are recorded on the credit side of the balance of payment account.
TYPES OF BOP:
A) Balanced BOP- when the balance of the debit side becomes equal to the correct side it refers to the balanced BOP.
B) Deficit BOP- when debit side is greater than credit side it is known as the deficit BOP.
C) Surplus BOP- credit side that is payment received is greater than the debit side that is payments made it is known as a surplus BOP.
BALANCE OF TRADE
Balance of Trade is an accounting statement with imports and exports of only visible items are recorded.
Balance of Trade = exports of visible items - imports of visible items
Balance of trade is also prepared like the balance of payment account. It also has a debit and credit side.
The balance on Balance of Trade
1. Balanced BOT - when a debit side is equal to credit side it is termed as balanced BOT.
2.Deficient BOT - when a debit side is more than credit side it is termed as deficit BOT.
3.Surplus BOT- when credit side is more than debit side it is termed as surplus BOT.
BASIS:
BALANCE OF PAYMENT
BALANCE OF TRADE
MEANING
Balance of payment is an accounting statement showing all transactions between the normal resident of the country and the rest of the world.
Balance of trade is the difference between the number of exports and imports of visible items.
COMPONENTS
Balance of payment includes visible items , invisible items, unilateral transfers, and capital transfer.
Balance of trade includes imports and exports of visible items only.
CAPITAL TRANSACTIONS
It records all capital transactions.
It does not record capital transactions.
SCOPE
It is a wider concept & includes BOT.
It is a part of BOP account.
SETTLEMENT
Unfavorable BOT can be settled using BOP.
In favor of BOP, can not be settled using BOT.
Components of Balance of Payments
Balance of payment can broadly be categorized into:
1.Current Account- Current account is an account which records import and exports of all goods and services and unilateral transfers during a given period of time.
Components of current account-
- export and import of visible item( goods)- all imports and exports of visible items that are goods are recorded under the current account of b.o. p.
- exports and imports of invisible items(services)- all imports and exports of invisible items that are services are recorded under the current account of b o p.
- United transfers to and from abroad- all United transfers including gifts Grand scholarships and other one-sided transactions are also recorded in the current account.
- income received to and from abroad- it includes all the income received and paid by a normal resident of a country from the rest of the world. it also includes incomes in the form of interest rent for and profits.
CREDIT ITEMS | DEBIT ITEMS | NET CREDIT (CREDIT - DEBIT) |
Visible Trade (export of goods) | Import of goods. | Net exports of goods. |
Invisible trade (export of services) | Import of services. | Net export of services. |
Unilateral transfer (transfer receipts) | Transfer payments. | Net transfer receipts. |
Income receipts & payments (income receipts) | Income payments. | Net income receipts. |
Current receipts | Current payments. | Current account balance. |
2. Capital account- Capital account under b o p records all the transaction which leads to change in asset or liabilities of a country or its government.
Components of capital account
1. Borrowings and lending to and from abroad-
- all the boring from abroad by private sector government, etc. the money received from the rest of the world in the form of borrowing and repayment of the loan is recorded on the credit side of a BOP.
- all the learnings to abroad by government-private sector etc in the money paid to inform of loan granted and repayment of loan taken is recorded on the debit side.
2. Investment to and from abroad- it includes;
- Any kind of investment by rest of the world in domestic securities real estate etc . the money received as the investment is recorded on credit side.
- Any kind of investment made in foreign country info what is real estate etc all the money paid as an investment is recorded on the debit side.
3. Change in foreign exchange reserve -
- foreign exchange is a financial asset of government kept by Central Bank. an increase in reserve will reduce the cast available as foreign exchange is purchased by spending cash and hence recorded on the debit side and decrease in reserve will increase in cash available as foreign exchange is sold for cash and hence recorded credit side.
Balance on Capital Account
All the payments made on the count of capital account are recorded on the debit side and all the payments received on the account of capital account are recorded on the credit side.
- The net value of the debit and credit side is the balance of the capital account.
- The surplus in the capital account arises when the credit side is more than the debit side.
- Deficit and capital account arises when the debit side is more than a credit side.
AUTONOMOUS AND ACCOMODATING ITEMS
All the transactions in b o p are categorised into autonomous items and accommodating items.
Autonomous Items-
Autonomous items refer to those items which take place due to some economic reasons that are profit maximization.
These are also known as 'above the line item ‘. Autonomous items are independent of the balance of payment account. autonomous items take place on current and capital account.
- On current account exports and imports of goods is the autonomous item.
- and Capital account receipts and payments of long term loans by private individuals are autonomous items.
Accommodating Items-
Accommodating items are those items which are undertaken to cover the deficit of surplus in an autonomous transaction that is these are the result of the autonomous transaction.
These transactions are also known as' below the line items'
Let us differentiate between autonomous and accommodating items with the help of an example.
In the above example, all the transactions until point number 7 autonomous items are there occur due to some economic reasons. but. Number it is an accommodating item as this is done to cover a deficit in BOP account.
BASIS | AUTONOMOUS ITEMS | ACCOMODATING ITEMS |
MEANING | Autonomous items refer to items which take place due to o some economic reasons such as profit maximization. | accommodating items refer to those items which are undertaken to cover deficit or surplus in autonomous transaction i.e these are the result of the autonomous transaction. |
EFFECT ON BOP | Autonomous transactions are independent of the state of BOP account. | Accommodating transactions are undertaken to maintain the balance in BOP account. |
CURRENT/CAPITAL ACCOUNT | Autonomous transactions take place on both current and capital accounts. | Accommodating transactions take place only on capital account. |
ALTERNATE NAME | These items are also known as above the line items. | These items are also known as below the line items. |
Deficit (Disequilibrium) in the Balance of Payments
Deficit in the Balance of payments account arises when total in falls on account of autonomous transactions and less than total output outflows on account of such transaction.
Deficit=inflow > outflows.
