A Report On

Balance Of Payment

Submitted To: Submitted By:

Dr. ASHOK PANIGRAHI PUSHPAK JAIN

Associate Professor SHUBHAM JAIN

NMIMS College UMAR MASTAN

AAYUSH SHARMA

MBA Pharma Tech 2nd yr

Roll No. A031, A032 & A034

NARSEE MONJEE INSTITUTE OF MANAGEMENT

STUDIES SHIRPUR, MAHARASHTRA

(DEEMED TO BE UNIVERSITY)

CERTIFICATE

Certified that the report titled BALANCE OF PAYMENT from the course Macroeconomics

Concept & Application presented by PUSHPAK JAIN, SHUBHAM JAIN, UMAR MASTAN &

AAYUSH SHARMA, represents their original work which was carried by them at NMIMS

Shirpur, under the guidance and supervision of:

NAME OF GUIDE:- Dr. Ashok Panigrahi

Date: 12 August 2014

ACKNOWLEDGEMENT

With our sincere regards, we wish to acknowledge our indebtness and gratitude to the

contributions of people who helped us at every stage of the project.

We are very much like to express our gratitude and profoundest thanks to our

project guide Dr. Ashok Panigrahi for their sustained guidance, invaluable suggestions and

constant encouragement without which it would not have been possible for us to complete

this project.

A REPORT ON

“BALANCE OF PAYMENTS”

BALANCE OF PAYMENTS

Definition:

Balance of payments accounts are an accounting record of all monetary transactions between

a country and the rest of the world. These transactions include payments for the country's

exports and imports of goods, services, financial capital, and financial transfers.

In simple words, it is the method countries use to monitor all international monetary

transactions at a specific period of time. Usually, the BOP is calculated every quarter and

every calendar year. All trades conducted by both the private and public sectors are

accounted for in the BOP in order to determine how much money is going in and out of a

country. If a country has received money, this is known as a credit, and if a country has paid

or given money, the transaction is counted as a debit. Theoretically, the BOP should be zero,

meaning that assets (credits) and liabilities (debits) should balance, but in practice this is

rarely the case. Thus, the BOP can tell the observer if a country has a deficit or a surplus and

from which part of the economy the discrepancies are stemming.

In other words:

The balance of payments of a country is a systematic record of all economic transactions

between the residents of a country and the rest of the world. It presents a classified record of

all receipts on account of goods exported, services rendered and capital received by residents

and payments made by theme on account of goods imported and services received from the

capital transferred to non-residents or foreigners.

- Reserve Bank of India

The above definition can be summed up as following: - Balance of Payments is the summary

of all the transactions between the residents of one country and rest of the world for a given

period of time, usually one year.

Purpose:

The BOP is an important indicator of pressure on a country’s foreign exchange rate,

and thus on the potential for a firm trading with or investing in that country to

experience foreign exchange gains or losses. Changes in the BOP may predict the

imposition or removal of foreign exchange controls.

Changes in a country’s BOP may signal the imposition or removal of controls over

payment of dividends and interest, license fees, royalty fees, or other cash

disbursements to foreign firms or investors.

The BOP helps to forecast a country’s market potential, especially in the short run. A

country experiencing a serious trade deficit is not likely to expand imports as it would

if running a surplus. It may, however, welcome investments that increase its exports.

Terminologies:

a. Favorable Balance Of Payments

Value of total receipts more than total payments

b. Adverse Balance Of Payments

Value of total receipts less than total payments

c. Balanced Balance Of Payments:

Value of total receipts equals total payments.

d. Unrequited receipts:

Receipts for which nothing has to be paid in return.

e. Unrequited payments:

Payments for which nothing is received in return.

The definition given by RBI needs to be clarified further for the following points:

A. Economic Transactions

An economic transaction is an exchange of value, typically an act in which there is transfer of

title to an economic good the rendering of an economic service, or the transfer of title to

assets from one economic agent (individual, business, government, etc) to another. An

international economic transaction evidently involves such transfer of title or rendering of

service from residents of one country to another. Such a transfer may be a requited transfer

(the transferee gives something of an economic value to the transferor in return) or an

unrequited transfer (a unilateral gift). The following are the basic types of economic

transactions that can be easily identified:

1. Purchase or sale of goods or services with a financial quid pro quo – cash or a promise to

pay. [One real and one financial transfer].

2. Purchase or sale of goods or services in return for goods or services or a barter

transaction. [Two real transfers].

3. An exchange of financial items e.g. – purchase of foreign securities with payment in cash

or by a cheque drawn on a foreign deposit. [Two financial transfers].

4. A unilateral gift in kind [One real transfer].

5. A unilateral financial gift. [One financial transfer].

B. Resident

The term resident is not identical with “citizen” though normally there is a substantial

overlap. As regards individuals, residents are those individuals whose general centre of

interest can be said to rest in the given economy. They consume goods and services;

participate in economic activity within the territory of the country on other than temporary

basis. This definition may turnout to be ambiguous in some cases. The “Balance of Payments

Manual” published by the “International Monetary Fund” provides a set of rules to resolve

such ambiguities.

As regards non-individuals, a set of conventions have been evolved. E.g. – government and

non profit bodies serving resident individuals are residents of respective countries, for

enterprises, the rules are somewhat complex, particularly to those concerning unincorporated

branches of foreign multinationals. According to IMF rules these are considered to be

residents of countries in which they operate, although they are not a separate legal entity from

the parent located abroad.

International organisations like the UN, the World Bank, and the IMF are not considered to

be residents of any national economy although their offices are located within the territories

of any number of countries.

To certain economists, the term BOP seems to be somewhat obscure. Yeager, for example,

draws attention to the word ‘payments’ in the term BOP; this gives a false impression that the

set of BOP accounts records items that involve only payments. The truth is that the BOP

statements records both payments and receipts by a country. It is, as Yeager says, more

appropriate to regard the BOP as a “balance of international transactions” by a country.

Similarly the word ‘balance’ in the term BOP does not imply that a situation of comfortable

equilibrium; it means that it is a balance sheet of receipts and payments having an accounting

balance.

Like other accounts, the BOP records each transaction as either a plus or a minus. The

general rule in BOP accounting is the following:-

a) If a transaction earns foreign currency for the nation, it is a credit and is recorded as a

plus item.

b) If a transaction involves spending of foreign currency it is a debit and is recorded as a

negative item.

The BOP is a double entry accounting statement based on rules of debit and credit similar to

those of business accounting & book-keeping, since it records both transactions and the

money flows associated with those transactions. Also in case of statistical discrepancy the

difference amount is adjusted with errors and omissions account and thus in accounting sense

the BOP statement always balances.

BALANCE OF TRADE

Balance of trade may be defined as the difference between the value of goods and services

sold to foreigners by the residents and firms of the home country and the value of goods and

services purchased by them from foreigners. In other words, the difference between the value

of goods and services exported and imported by a country is the measure of balance of trade.

If two sums (1) value of exports of goods and services and (2) value of imports of goods and

services are exactly equal to each other, we say that there is balance of trade equilibrium or

balance; if the former exceeds the latter, we say that there is a balance of trade surplus; and if

the later exceeds the former, then we describe the situation as one of balance of trade deficit.

Surplus is regarded as favourable while deficit is regarded as unfavourable.

The above mentioned definition has been given by James. E. Meade – a Nobel Prize British

Economist. However, some economists define balance of trade as a difference between the

value of merchandise (goods) exports and the value of merchandise imports, making it the

same as the ‘Goods Balance” or the “Balance of Merchandise Trade”. There is n doubt that

the balance of merchandise trade is of great significance to exporting countries, but still the

BOT as defined by J. E. Meade has greater significance.

Regardless of which idea is adopted, one thing is certain i.e. that balance of trade is a national

injection and hence it is appropriate to regard an active balance (an excess of credits over

debits) as a desirable state of affairs. Should this then be taken to imply that a passive trade

balance (an excess of debits over credits) is necessarily a sign of undesirable state of affairs in

a country? The answer is “no”. Because, take for example, the case of a developing country,

which might be importing vast quantities of capital goods and technology to build a strong

agricultural or industrial base. Such a country in the course of doing that might be forced to

experience passive or adverse balance of trade and such a situation of passive balance of

trade cannot be described as one of undesirable state of affairs. This would therefore again

suggest that before drawing meaningful inferences as to whether passive trade balances of a

country are desirable or undesirable, we must also know the composition of imports which

are causing the conditions of adverse trade balance.

DIFFERENCE BETWEEN BOT & BOP:

BOT BOP

• Records only

merchandise

transactions

• Does not record

transactions of capital

nature

• A part of current

account of BOP

• Records transactions relating to both goods

and services

• Records transaction of capital nature

• Includes BOT , Balance of services , Balance

Of Unrequited Transfers and Balance Of

Capital Transactions.

The various components of a BOP statement are:

A. Current Account

B. Capital Account

C. Errors & Omissions

Current Account

The current account shows the net amount a country is earning if it is in surplus, or spending

if it is in deficit. It is the sum of the balance of trade (net earnings on exports minus payments

for imports), factor income (earnings on foreign investments minus payments made to foreign

investors) and cash transfers. It is called the current account as it covers transactions in the

"here and now" – those that don't give rise to future claims.

It can be calculated by a formula:

Where,

CA: current account

X and M: export and import of goods and services respectively

NY: net income from abroad

NCT: net current transfers.

BALANCE OF CURRENT ACCOUNT

BOP on current account refers to the inclusion of three balances of namely – Merchandise

balance, Services balance and Unilateral Transfer balance. In other words it reflects the net

flow of goods, services and unilateral transfers (gifts). The net value of the balances of visible

trade and of invisible trade and of unilateral transfers defines the balance on current account.

BOP on current account is also referred to as Net Foreign Investment because the sum

represents the contribution of Foreign Trade to GNP.

Thus the BOP on current account includes imports and exports of merchandise (trade

balances), military transactions and service transactions (invisibles). The service account

includes investment income (interests and dividends), tourism, financial charges (banking and

insurances) and transportation expenses (shipping and air travel). Unilateral transfers include

pensions, remittances and other transfers for which no specific services are rendered.

It is also worth remembering that BOP on current account covers all the receipts on account

of earnings (or opposed to borrowings) and all the payments arising out of spending (as

opposed to lending). There is no reverse flow entailed in the BOP on current account

transactions.

STRUCTURE OF CURRENT ACCOUNT

Transactions Credit Debit Net

Balance

1. Merchandise Export Import -

2. Foreign Travel Earning Payment -

3. Transportation Earning Payment -

4. Insurance (Premium) Receipt Payment -

5. Investment Income Dividend

Receipt

Dividend

Payment

-

6.Government (purchase of goods &

services)

Receipt Payment -

CURRENT A/C Balance - - Surplus (+)

Deficit (-)

THE CAPITAL ACCOUNT

The capital account records all international transactions that involve a resident of the country

concerned changing either his assets with or his liabilities to a resident of another country.

Transactions in the capital account reflect a change in a stock – either assets or liabilities.

It is often useful to make distinctions between various forms of capital account transactions.

The basic distinctions are between private and official transactions, between portfolio and

direct investment and by the term of the investment (i.e. short or long term). The distinction

between private and official transaction is fairly transparent, and need not concern us too

much, except for noting that the bulk of foreign investment is private.

Direct investment is the act of purchasing an asset and the same time acquiring control of it

(other than the ability to re-sell it). The acquisition of a firm resident in one country by a firm

resident in another is an example of such a transaction, as is the transfer of funds from the

‘parent company in order that the ‘subsidiary’ company may itself acquire assets in its own

country. Such business transactions form the major part of private direct investment in other

countries, multinational corporations being especially important. There are of course some

examples of such transactions by individuals, the most obvious being the purchase of the

‘second home’ in another country.

Portfolio investment by contrast is the acquisition of an asset that does not give the purchaser

control. An obvious example is the purchase of shares in a foreign company or of bonds

issued by a foreign government. Loans made to foreign firms or governments come into the

same broad category. Such portfolio investment is often distinguished by the period of the

loan (short, medium or long are conventional distinctions, although in many cases only the

short and long categories are used). The distinction between short term and long term

investment is often confusing, but usually relates to the specification of the asset rather than

to the length of time of which it is held. For example, a firm or individual that holds a bank

account with another country and increases its balance in that account will be engaging in

short term investment, even if its intention is to keep that money in that account for many

years. On the other hand, an individual buying a long term government bond in another

country will be making a long term investment, even if that bond has only one month to go

before the maturity. Portfolio investments may also be identified as either private or official,

according to the sector from which they originate.

The purchase of an asset in another country, whether it is direct or portfolio investment,

would appear as a negative item in the capital account for the purchasing firm’s country, and

as a positive item in the capital account for the other country. That capital outflows appear as

a negative item in a country’s balance of payments, and capital inflows as positive items,

often causes confusions. One way of avoiding this is to consider that direction in which the

payment would go (if made directly). The purchase of a foreign asset would then involve the

transfer of money to the foreign country, as would the purchase of an (imported) good, and so

must appear as a negative item in the balance of payments of the purchaser’s country (and as

a positive item in the accounts of the seller’s country).

The net value of the balances of direct and portfolio investment defines the balance on capital

account.

Short term capital movement includes:

Purchase of short term securities

Speculative purchase of foreign currency

Cash balances held by foreigners

Net balance of current account

Long term capital movement includes:

Investments in shares, bonds, physical assets etc.

Amortization of capital

CAPITAL ACCOUNT CONVERTIBILITY (CAC)

While there is no formal definition of Capital Account Convertibility, the committee under

the chairmanship of S.S. Tarapore has recommended a pragmatic working definition of CAC.

Accordingly CAC refers to the freedom to convert local financial assets into foreign financial

assets and vice – a – versa at market determined rates of exchange. It is associated with

changes of ownership in foreign / domestic financial assets and liabilities and embodies the

creation and liquidation of claims on, or by, the rest of the world. CAC is coexistent with

restrictions other than on external payments. It also does not preclude the imposition of

monetary / fiscal measures relating to foreign exchange transactions, which are of prudential

nature.

Following are the prerequisites for CAC:

1. Maintenance of domestic economic stability.

2. Adequate foreign exchange reserves.

3. Restrictions on inessential imports as long as the foreign exchange position is not very

comfortable.

4. Comfortable current account position.

5. An appropriate industrial policy and a conducive investment climate.

6. An outward oriented development strategy and sufficient incentives for export growth.

DIFFERENCE BETWEEN CURRENT ACCOUNT AND CAPITAL

ACCOUNT

CURRENT ACCOUNT CAPITAL ACCOUNT

• Indicates flow aspect of

country’s national transactions

• Relates to goods , services and

unrequited transfers

• Indicates changes in stock magnitudes

• Relates to all transactions constituting

debts and transfer of ownership

STRUCTURE OF BALANCE OF PAYMENTS ACCOUNT

CREDITS DEBITS

Current A/c:

• Exports of goods(Visible items)

• Exports of services (Invisibles)

• Unrequited receipts(gifts , remittances,

indemnities, etc. from foreigners)

Capital A/c:

• Capital receipts (Borrowings from

abroad , capital repayments by , or sale

of assets to foreigners, increase in stock

of gold and reserves of foreign currency

etc.)

Current A/c:

• Imports of goods(Visible items)

• Imports of services(Invisibles)

• Unrequited payments( gifts, remittance,

indemnities etc. to foreigners)

Capital A/c:

• Capital payments (lending to , capital

repayments to , or purchase of assets from

foreigners, reduction in stock of gold and

reserves of foreign currency etc.)

ERRORS AND OMISSIONS

Errors and omissions is a “statistical residue.” It is used to balance the statement because in

practice it is not possible to have complete and accurate data for reported items and because

these cannot, therefore, ordinarily have equal entries for debits and credits. The entry for net

errors and omissions often reflects unreported flows of private capital, although the

conclusions that can be drawn from them vary a great deal from country to country, and even

in the same country from time to time, depending on the reliability of the reported

information. Developing countries, in particular, usually experience great difficulty in

providing reliable information.

Errors and omissions (or the balancing item) reflect the difficulties involved in recording

accurately, if at all, a wide variety of transactions that occur within a given period of (usually

12 months). In some cases there is such large number of transactions that a sample is taken

rather than recording each transaction, with the inevitable errors that occur when samples are

used. In others problems may arise when one or other of the parts of a transaction takes more

than one year: for example wit a large export contract covering several years some payment

may be received by the exporter before any deliveries are made, but the last payment will not

made until the contract has been completed. Dishonesty may also play a part, as when goods

are smuggled, in which case the merchandise side of the transaction is unreported although

payment will be made somehow and will be reflected somewhere in the accounts. Similarly

the desire to avoid taxes may lead to under-reporting of some items in order to reduce tax

liabilities.

Finally, there are changes in the reserves of the country whose balance of payments we are

considering, and changes in that part of the reserves of other countries that is held in the

country concerned. Reserves are held in three forms: in foreign currency, usually but always

the US dollar, as gold, and as Special Deposit Receipts (SDR’s) borrowed from the IMF.

Note that reserves do not have to be held within the country. Indeed most countries hold a

proportion of their reserves in accounts with foreign central banks.

The changes in the country’s reserves must of course reflect the net value of all the other

recorded items in the balance of payments. These changes will of course be recorded

accurately, and it is the discrepancy between the changes in reserves and the net value of the

other record items that allows us to identify the errors and omissions.

BASIC BALANCE

The basic balance was regarded as the best indicator of the economy’s position vis-à-vis other

countries in the 1950’s and the 1960’s. It is defined as the sum of the BOP on current account

and the net balance on long term capital, which were considered as the most stable elements

in the balance of payments. A worsening of the basic balance [an increase in a deficit or a

reduction in a surplus or even a move from the surplus to deficit] was seen as an indication of

deterioration in the [relative] state of the economy.

The short term capital account balance is not included in the basic balance. This is perhaps

for two main reasons:

a) Short term capital movements unlike long term capital movements are relatively volatile

and unpredictable. They move in and out of the country in a period of less than a year or

even sooner than that. It would therefore be improper to treat short term capital

movements on the same footing as current account BOP transactions which are extremely

durable in nature. Long term capital flows are relatively more durable and therefore they

qualify to be treated along side the current account transactions to constitute basic

balance.

b) In many cases, countries don’t have a separate short term capital account as they

constitute a part of the “Errors and Omissions Account.”

A deficit on the basic balance could come about in various ways, which are not mutually

equivalent. E.g. suppose that the basic balance is in deficit because a current account deficit is

accompanied by a deficit on the long term capital account. The long term capital outflow

will, in the future, generate profits, dividends and interest payments which will improve the

current account and so, ceteris paribus, will reduce or perhaps reduce the deficit. On the other

hand, a basic balance surplus consisting of a deficit on current account that is more than

covered by long term borrowings from abroad may lead to problems in future, when profits,

dividends etc are paid to foreign investors.

THE OFFICIAL SETTLEMENT CONCEPT

An alternative approach for indicating, a deficit or surplus in the BOP is to consider the net

monetary transfer that has been made by the monetary authorities is positive or negative,

which is the so called – settlement concept.

If the net transfer is negative (i.e. there is an outflow) then the BOP is said to be in deficit, but

if there is an inflow then it is surplus. The basic premise is that the monetary authorities are

the ultimate financers of any deficit in the balance of payments (or the recipients of any

surplus). These official settlements are thus seemed as the accommodating item, all other

being autonomous.

The monetary authorities may finance a deficit by depleting their reserves of foreign

currencies, by borrowing from the IMF or by borrowing from other foreign monetary

authorities. The later source is of particular importance when other monetary authorities hold

the domestic currency as a part of their own reserves. A country whose currency is used as a

reserve currency (such as the dollars of US) may be able to run a deficit in its balance of

payments without either depleting its own reserves or borrowing from the IMF since the

foreign authorities might be ready to purchase that currency and add it to its own reserves.

The settlements approach is more relevant under a system of pegged exchange rates than

when the exchange rates are floating.

ACCOMMODATING & AUTONOMOUS CAPITAL FLOWS

Economists have often found it useful to distinguish between autonomous and

accommodating capital flows in the BOP. Transactions are said to Autonomous if their value

is determined independently of the BOP. Accommodating capital flows on the other hand are

determined by the net consequences of the autonomous items. An autonomous transaction is

one undertaken for its own sake in response to the given configuration of prices, exchange

rates, interest rates etc, usually in order to realise a profit or reduced costs. It does not take

into account the situation elsewhere in the BOP. An accommodating transaction on the other

hand is undertaken with the motive of settling the imbalance arising out of other transactions.

An alternative nomenclature is that capital flows are ‘above the line’ (autonomous) or ‘below

the line’ (accommodating). Obviously the sum of the accommodating and autonomous items

must be zero, since all entries in the BOP account must come under one of the two headings.

Whether the BOP is in surplus or deficit depends on the balance of the autonomous items.

The BOP is said to be in surplus if autonomous receipts are greater than the autonomous

payments and in deficit if vice – a – versa.

Essentially the distinction between both the capital flow lies in the motives underlying

a transaction, which are almost impossible to determine. We cannot attach the labels to

particular groups of items in the BOP accounts without giving the matter some thought. For

example a short term capital movement could be a reaction to difference in interest rates

between two countries. If those interest rates are largely determined by influences other than

the BOP, then such a transaction should be labelled as autonomous. Other short term capital

movements may occur as a part of the financing of a transaction that is itself autonomous

(say, the export of some good), and as such should be classified as accommodating.

There is nevertheless a great temptation to assign the labels ‘autonomous’ and

‘accommodating’ to groups of item in the BOP. i.e. to assume, that the great majority of trade

in goods and of long term capital movements are autonomous, and that most short term

capital movements are accommodating, so that we shall not go far wrong by assigning those

labels to the various components of the BOP accounts. Whether that is a reasonable

approximation to the truth may depend in part on the policy regime that is in operation. For

example what is an autonomous item under a system of fixed exchange rates and limited

capital mobility may not be autonomous when the exchange rates are floating and capital may

move freely between countries.

BALANCE OF INVISIBLE TRADE

Just as a country exports goods and imports goods a country also exports and imports what

are called as services (invisibles). The service account records all the service exported and

imported by a country in a year. Unlike goods which are tangible or visible services are

intangible. Accordingly services transactions are regarded as invisible items in the BOP.

They are invisible in the sense that service receipts and payments are not recorded at the port

of entry or exit as in the case with the merchandise imports and exports receipts. Except for

this there is no meaningful difference between goods and services receipts and payments.

Both constitute earning and spending of foreign exchange. Goods and services accounts

together constitute the largest and economically the most significant components in the BOP

of any country.

The service transactions take various forms. They basically include 1) transportation,

banking, and insurance receipts and payments from and to the foreign countries, 2) tourism,

travel services and tourist purchases of goods and services received from foreign visitors to

home country and paid out in foreign countries by home country citizens, 3) expenses of

students studying abroad and receipts from foreign students studying in the home country, 4)

expenses of diplomatic and military personnel stationed overseas as well as the receipts from

similar personnel who are stationed in the home country and 5) interest, profits, dividends

and royalties received from foreign countries and paid out to foreign countries. These items

are generally termed as investment income or receipts and payments arising out of what are

called as capital services. “Balance of Invisible Trade” is a sum of all invisible service

receipts and payments in which the sum could be positive or negative or zero. A positive sum

is regarded as favourable to a country and a negative sum is considered as unfavourable. The

terms are descriptive as well as prescriptive.

BALANCE OF VISIBLE TRADE

Balance of visible trade is also known as balance of merchandise trade, and it covers

all transactions related to movable goods where the ownership of goods changes from

residents to non-residents (exports) and from non-residents to residents (imports). The

valuation should be on F.O.B basis so that international freight and insurance are treated as

distinct services and not merged with the value of goods themselves. Exports valued on

F.O.B basis are the credit entries. Data for these items are obtained from the various forms

that the exporters have fill and submit to the designated authorities. Imports valued at C.I.F

are the debit entries. Valuation at C.I.F. though inappropriate, is a forced choice due to data

inadequacies. The difference between the total of debits and credits appears in the “Net”

column. This is the ‘Balance of Visible Trade.’

In visible trade if the receipts from exports of goods happen to be equal to the

payments for the imports of goods, we describe the situation as one of zero “goods balance.’

Otherwise there would be either a positive or negative goods balance, depending on whether

we have receipts exceeding payments (positive) or payments exceeding receipts (negative).

UNILATERAL TRANSFERS

Unilateral transfers or ‘unrequited receipts’, are receipts which the residents of a

country receive ‘for free’, without having to make any present or future payments in return.

Receipts from abroad are entered as positive items, payments abroad as negative items. Thus

the unilateral transfer account includes all gifts, grants and reparation receipts and payments

to foreign countries. Unilateral transfer consist of two types of transfers: (a) government

transfers (b) private transfers.

Foreign economic aid or assistance and foreign military aid or assistance received by

the home country’s government (or given by the home government to foreign governments)

constitutes government to government transfers. The United States foreign aid to India, for

BOP 9but a debit item in the US BOP). These are government to government donations or

gifts. There no well worked out theory to explain the behaviour of this account because these

flows depend upon political and institutional factors. The government donations (or aid or

assistance) given to government of other countries is mixed bag given for either economic or

political or humanitarian reasons. Private transfers, on the other hand, are funds received

from or remitted to foreign countries on person –to –person basis. A Malaysian settled in the

United States remitting $100 a month to his aged parents in Malaysia is a unilateral transfer

inflow item in the Malaysian BOP. An American pensioner who is settled after retirement in

say Italy and who is receiving monthly pension from America is also a private unilateral

transfer causing a debit flow in the American BOP but a credit flow in the Italian BOP.

Countries that attract retired people from other nations may therefore expect to receive an

influx of foreign receipts in the form of pension payments. And countries which render

foreign economic assistance on a massive scale can expect huge deficits in their unilateral

transfer account. Unilateral transfer receipts and payments are also called unrequited transfers

because as the name itself suggests the flow is only in one direction with no automatic

reverse flow in the other direction. There is no repayment obligation attached to these

transfers because they are not borrowings and lending’s but gifts and grants exchanged

between government and people in one country with the governments and peoples in the rest

of the world.

BALANCE OF PAYMENT – SUMMARY

Balance of Trade = Export of Goods – Import of Goods

Balance of Current Account = Balance of Trade + Net earnings on invisibles

Balance of Capital Account = Foreign exchange inflow – foreign exchange outflow,

on account of foreign investments, foreign loans, banking transactions and other

capital flows.

Overall Balance of Payment = Balance of current account + Balance of capital

account + statistical discrepancy.

CONCLUSION

Hereby while making this report we ran into a conclusion that BOP of a country

should be zero. It should neither be positive i.e. surplus nor be negative i.e. deficit.

Bibliography:

en.wikipedia.org/wiki/Balance_of_payments/

www.investopedia.com/articles/03/060403.asp

www.economicshelp.org/blog/glossary/balance-payments/

Balance of Payments - Paul Madson

International Financial Management - P G Apte

International Economics - Lindert

International Economics - Francis Chernuliam