final balance of payments ppt(2)

8/3/2019 Final Balance of Payments Ppt(2)

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BOP

.. is the record of the economic and financial flows

that take place over a specified time period

between residents and non-residents of a givencountry.


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Types of Balance of Payments

The BOP is divided into three main

categories:

The current account.

The capital account. The financial account.


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The Current AccountThe current account is used to mark the inflow

and outflow of goods and services into a

country. Earnings on investments, both public

and private, are also put into the current

account.


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The Capital Account

The capital account is where all international

capital transfers are recorded. This refers to the

acquisition or disposal of non-financial assets(for example, a physical asset such as land) and

non-produced assets, which are needed for

production but have not been produced, like amine used for the extraction of diamonds.


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The Financial Account

In the financial account, international

monetary flows related to investment in

business, real estate, bonds and stocks are

documented.


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Std components of BOP

CURRENT ACCOUNT CAPITAL ACCOUNT(+) Export fob +(-) Direct Investment(-) Import fob +(-) Portfolio Investment= Trade Balance +(-) Other Long term Capital(+) Exports on Non-financial services +(-) Other Short term Capital(-) Imports on Non-financial services +(-) Net errors and omissions(+) Investment Income(Credit) +(-) Counterpart items(-) Investment Income(Debit)

+(-) Total change in reserves

+(-) Private unrequited transfers+(-) Official unrequited transfers

= Current Account balance = Capital Account balance


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Importance

It is used to summarize all international economic

transactions for that country during a specific time

period, usually a year.

The BOP is determined by the country's exports and

imports of goods, services, and financial capital, as

well as financial transfers.

Balance of payments is one of the major indicators of

a country's status in international trade, with net

capital outflow.


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It reflects all payments and liabilities to foreigners

(debits) and all payments and obligations received

from foreigners (credits).

The BOP is an important indicator of pressure on a

countrys foreign exchange rate.

The BOP helps to forecast a countrys market

potential, especially in short run.


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Deficit

A deficit is the opposite of a surplus. If a

country imports more than it exports, it issaid to have a deficit.


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Factors which cause a Deficit in the

balance of Payments

Economic Growth

Decline in Competitiveness Higher inflation

Recession in other countries

Borrowing money Deterioration in the current account


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Economic Growth:If there is an increase in AD and National Income

increases, people will have more disposable income to

consume goods. If domestic producers can not meet the

domestic AD, consumers will have to imports goodsfrom abroad.

Fixed Exchange Rate:If the currency is overvalued, imports will be

cheaper and therefore there will be a higher Q ofimports. Exports will become uncompetitive and

therefore there will be a fall in the Quantity of exports.


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Higher inflation:

This makes exports less competitive and imports

more competitive. However this factor may be offset

by a decline in the value of sterling.

Recession in other countries:If the Pakistans main trading partners

experience negative economic growth then they

will buy less of our exports, worsening the current

account.


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Deterioration in the current account:This means that the value of exports has

increased at a slower rate than the value of imports.

Therefore there could have been an increase in thedeficit or the surplus could have changed into a

deficit.

Borrowing money:If countries are borrowing money to invest e.g.third world countries.


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Measures to correct the balance of

payments

The balance of payments can be decreased in three ways:

The foreign earnings should be increased by

export led growth.

The imports should be curtailed to essential

items only.

The expenditure on invisible imports should

be minimized.


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Highest priority to improvements in export

The measures which government

should adopt are:

Comprehensive system of export compensation.

Change in export quota policy

Access to imported raw materials

Access to credit for exporters


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final balance of payments ppt(2)

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