BALANCE OF PAYMENTS
Introduction
In the modern world there is hardly any country which is self sufficient in the sense that is produce all goods and services that it needs every country imports from other countries the goods that can not be produced at higher cost than foreign supplies similarly a country experts to other countries the goods & services that prefers to buy so the balance of payment is all about the imports and experts.
Definition
“The balance of payment is a comprehensive record of economic transactions of the residents of a country with rest of the world during a given period of time”
Purpose
The main purpose of keeping these record is to inform government of the international economics Pakistan of the country to help it in making decision about monetary and phiscal policy on the one hand and trade and payments on the other.
when transaction is credited and debited????
When a payment is receive from a foreign country it is a credit transaction where a payment to a foreign country is debit transaction.
Principal items included on the debit & credit side of the balance of payment.
A- The principle items shown on credit side are export of goods and services transfer receipts in form of sift etc from foreisers borrowing from abroad, foreigners direct investment and official sale of reserve assets including goold & foreign countries.
The Essay on Balance of trade and balance of payments
The balance of payments account indicates a systematic record of all export incomes and import payments of a country during any year. Any import from abroad has to be paid for. On the other hand, any export will bring money flow into the country. If we subtract the total value of the imported commodities from the total value of the exported commodities of a country, what we obtain is called the ‘ ...
B- Debit side
The principal items on debit side includes imperts of goods and services transfer payments it foreigners lending to foreign countries investment by residents in foreign countries. official purchase of reserve assets or gold from foreign countries.
How the (BOP) A/C is shaped?
The credit and debit items are shown vertically in BOP account of a country horizontally they are divided into 3 categories,
a) The current account
b) The capital account
c) The official settlement account/official reserve assets account
Define three categories of BOP account
a) The current account
b) The capital account
c) The official reserve assets account
Now let we explain then categorically one by one.
1- The current account
The balance of payments on current account includes items like imports and exports expenses on travel transportation insurance investment income etc these relates to current trends.
2- Capital account
Capital account is made up of the capital transaction e.g. borrowing and lending of capital, repayment of capital sale and purchase of securities and other assets to and from foreigners individuals and government.
When both the current and capital accounts are taken it is called the over all balance of payment. Which must balance.
3- The official reserve assets accounts.
Official reserve transaction consists of movements of international reserves by govt and official agencies to accommodate in balance arring from the current and capital accounts
In other worlds it measures the nations lesid and non liquid liabilities to foreign official holders and the change in a nations official reserve assets during the years
The Essay on MINI CASE: MEXICO’S BALANCE OF PAYMENTS PROBLEM
Recently, Mexico experienced large-scale trade deficits, depletion of foreign reserve holdings and a major currency devaluation in December 1994, followed by the decision to freely float the peso. These events also brought about a severe recession and higher unemployment in Mexico. Since the devaluation, however, the trade balance has improved. Investigate the Mexican experiences in detail and ...
8- Balance
There we have 2 types of balances
a) Surplus balance of payments
b) Deficit balance of payments
If we have receipts (inflow of cash) on credit side and payments (outflow of cash) on debit side so, when the receipts increase from payment side it will be the surplus balance of payments
surplus = credit > debit
and if the receipts or credit side is less than compare to the payments or debit side than it will be the deficit balance of payment
BOP chart..
9- definition
“The difference between the value of commodity exported and imported is known as the balance of trade”
If imports exceeds from export then this will be the balance of trade will be unfavorable and if exports exceeds imports then it will be the favorable balance of trade.
Our imports and exports consists of two types of transaction
a) Visible item transaction
b) Invisible item transaction
Visible transaction are commodities merchandise transactions, and services received or rendered are know as invisible transactions
The balance of trade only deals with the import or export of visible items and those items are recorded at custom barrier while on the other hand invisible items are not recorded at custom barrier.
Difference between BOP and BOT
Balance of payments | Balance of trade |
It is broader in sense | It is a part of balance of payments |
It is the over all record of our economic transactions with the rest of the world. | It is just the difference b/w the exports and imports |
It covers visible and invisible both | It cover only the visible items |
For the countries over all economic position what really matter is its balance of payment and not the balance of trade.
