Mon, Dec

Balance Of Payments | Current Account | Capital Account | Official Reserves


Balance of payments is a systematic record of all economist transaction completed between the residents of a country and the residents of the rest of the world. The economic transaction consist of exports and import of goods exports and imports of services.

Outflow and inflow of capital and official capital transfer.

Thus in Bop table we enter the receipts on the one side and payments on the other side. Thus Bop is just like double entry recorded book keeping where both the sides i.e. receipts and payments are equal.

Hance the Bop is in balance. To example Bop we a schedule:


Current Account

Receipts Payments
1.Export of goods 1.Import of goods
2.Export of services 2.Import of services

i .embassies , foreign delegates.

ii. educational, recreational services

.iii.dividends or interest

iv.air and sea services

v.unlimited transfers(remittances)

i .embassies , foreign delegates.

ii. educational, recreational services

.iii.dividends or interest

iv.air and sea services

v.unlimited transfers(remittances)

Capital Account

1. long-term capital inflow 1.long-term capital outflow
2. short-term capital inflow 2.short-term capital outflow

Official reserves

1.official purchase of facing cum 1. official sale of foreign cum
2. drawing from IMF under ODRs and SDRs 2. Increase in the resources at IMF

The current account of BOP consists of the receipts and payments against exports and imports of goods and services and unilateral transfers. The exports and imports of visible goods / items is known as BOT.or those items which are recorded at the time of exportation and importation.

A part from this BOP include invisible goods/items and services which are not recorded. In capital account we include the short-term and long-term capital movements. If we sum the receipts and payments of current and capital accounts,we get the basic equilibrium in BOP. If p>r,BOP is in deficit OR If R>P ,BOP is in surplus.

Thus to remove the deficit or surplus.(dis equilibrium) in the basic equilibrium of BOP the third account of official reserves account is used. If a country is facing deficit in the basic equilibrium of BOP then the country will purchase foreign currency or will take loan from IMF under ordinary drawing right and special drawing right. so deficit can be removed.

Contrary if a country is facing surplus in its BOP.It can accumulate its foreign reserves,may its currency value. OR lend reserves to IMF.so in this way BOP disequilibrium may be removed. In BOP Accounting If R>P oR in surplus is known as autonomous items. In BOP accounting to remove deficit if movement of capital takes place is known as accommodating items.

Both the accounting 1) current and capital account are known as above the line. but the accounting which are concerned with official reserves is known as below the line.

Deficit in BOP

The deficit in BOP can be explained in many ways;

If at current account the payments are greater than receipts.then it will be balanced thought capital inflow or using accommodating items,official reserves,official loans and devaluation of currency is accorded deficit in the BOP.the official reserve method is also used to explain deficit orsurplus in BOP.the deficit in BOP would!,if there is an outflow of official reserves and using the right of ODRs,SDRs with IMF.

the above discussion about deficit is concerned with fixed exchange rate system.but now-a-days it is approximately washed out through flexible exchange rate.

Causes of disequilibrium in BOP

If it is fixed exchange rate system and P>R, deficit arises or if DD for dollar is greater than SS of dollar deficit occurs as shown in diagram:

in diagram at point E DD$=SS$:

if DD curve will shift to the right.

so deficit=QQ-OQ=OQ

detail of causes inBOP or type of disequilibrium in BOP

Income Type Of Disequilibrium

If income and employment of a country increases, it will lead to increase imports and export.consequently payment exceed receipts and deficit occur.

Price Type Of Disequilibrium

if due to demand pull inflation or cost push inflation prices increase within the country is compare to world market. the increased price will discourage exports and encourage imports so deficit in BOP appears

Structural Dis-Equlibrium

dis-equilibrium rises because of structural change i.e

  • If population,the domestic use of goods will.so exports!
  • If in a country reserves of natural resources,exports
  • If new substitutes develop internationally, exports.
  • If in a country there is inflationary pressure exports.
  • If a country is engaged in process of development, she imports technology and necessary raw material,then imports

Capital Movements

if capital is floating out or the country is spending more on defense or the country is repaying the loan. in such cases the country,s payments will be greater than receipts. so these items are responsible for deficit in BOP.

TOT (Term Of Trade)

If term of trade is not favorable then P>R which is responsible for deficit in BOP

Supply Shocks

Supply shocks is also responsible for deficit in BOP if a country is an agricultural. if its is bad. the imports will exceed exports

World Recession And Trade Restrictions

when in 1973 OPEC countries ged the oil price from $2.per barrel to $11 per barrel. so international recession appeared and captured the whole world as now-a-days in 2009 the world s facing which this effect the 3rd world countries adversity

Economic Development

The developing countries wish to have repaid economic development. they import technology due to which imports exceed exports, and deficit in BOP appears.

Related Articles

  • Tax
  • Banking
  • Theory Of International Trade
  • Theory Of Comparative Advantage