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Balance of Payment

Meaning of Balance of Payment
Balance of payment refers to the statement of accounts recording all economic transactions of the country with rest of the world. Each country enters into economic transactions with other countries of the world. As a result of such transactions, it receives payments from and makes payments to other countries. BOP is a statement of account of these receipts and payments balances.

Balance of Trade
BOT is the difference between the value of import and export of only physical goods or visible items.

Visible item of BOP
All such items of exports and imports which are material in nature are called visible item of BOP.

Invisible item of BOP
It refers to all type of services which are rendered to rest of the world as exports or received from the rest of the world as imports as well as exports.

Components of BOP Account

  • Current Account
  • Capital Account

Current Account
Current account refers to an account which records all the transactions relating to export and import of goods and services and unilateral transfer. It contains receipts and payment relating to all the transactions of visible items, invisible item and unilateral transfers.
Its components are as follow:

  1. Merchandise
    It refers to all such items of exports and imports which are material in nature and are therefore called visible. Current account showing export and import of visible is often referred to as balance of trade account.

  2. Invisibles
    It refers to all such items of export and import which are non – material and are therefore, called invisible. Invisibles in India's balance of payment include following sub-components.
    1. Non – Factor Services
      It refers to payment in terms of revenue or account of services such as shipping, insurance and banking.
    2. Income
      It refers to payment in terms of income arising out of factor services by way of rent, interest and profit.
    3. Current Transfer
      It refers to unilateral transfer by way of gifts, grants and workers remittances.
Components of Current Account of BOP
Components of Current Account of BOP
 
Capital Account
Capital account of BOP records all those transactions between residence of a country and rest of the world which cause a change in assets or liabilities of the residence of the country or its government. It is related to claim and liability of financial nature.
Its components are as follows:
  • Borrowing
    It include external commercial borrowing and external assistance. External assistance is recorded as the net of receipts while commercial borrowing is recorded as the net of borrowing in the capital account of India's BOP.

  • Foreign Investment
    It includes FDI and portfolio investment. Investment by our residents in rest of the world is recorded under 'debit items' while investment by non – residents in our country is recorded under 'credit items' in current account BOP.

  • NRI Deposits
    NRI deposits refers to the transfer of funds by the non – residents Indians from rest of the world. Net value of these transfer is recorded which is estimated as the different between NRI deposits and NRI withdrawals.

  • Banking Capital
    It refers to foreign assets holding of the commercial banks owing to drawn down of foreign assets of the commercial bank, banking capital inflow into the domestic economy tends to rise.

  • Short term Trade credit
    Inflow of foreign exchange on account of short term trade credit is recorded in the 'credit side' of capital account of BOP.
Components of Capital Account of BOP
Components of Capital Account of BOP
 
Balance in Capital Account
  • Surplus
    Surplus in capital account arises when credit item are more than debit items. It indicates net inflow of capital.
  • Deficit
    Deficit in capital account arises when debit item are more than credit items. It indicates net outflow of capital.

Autonomous item and Accommodating items

  • Autonomous Items
    It refer to these international economic transaction which take place due to some economic motive such as profit minimization. These items are also known as above the line items. Autonomous transactions are independent of the rate of BOP account. It takes place on both current and capital account. In current account expert and import of good are autonomous transaction. In capital account receipt and repayment of long term loans are autonomous transaction.

  • Accommodating Items
    It refers to the transactions that are under taken to cover deficit or surplus in autonomous transaction. These items are also known as below line items. They are capital transactions which are mean t to correct the disequilibrium in autonomous item of BOP.

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