Balance of trade and balance of payments

INTRODUCTION :

“The balance of payment of a country is systematic record of all economic transactions between the residents of the reporting country and the residents of foreign countries during a given period of time “

The term ‘residents’ includes individuals, businesses, governments and their organizations and agencies.

International organizations are classified as foreign residents.

economic transactions include transfer of goods and assets or rendering of services from residents of one country to the residents of other countries.

The balance of payment record is maintained in a double – entry book – keeping method.

Meaning :

Since balance of payment record is in the form of double – entry book keeping method, all international transactions enter into the record as ‘debit’ or ‘credit’.

In general, the payment received from other countries enter as ‘credit’ and the payment made to other countries enter as ‘debit’

The following table shows the balance of payment record :

BALANCE OF PAYMENTS ACCOUNT

RECEIPTS (CREDITS)

PAYMENTS (DEBITS)

1)Exports of goods

1)Imports of goods.

Trade account balance

2)Exports of services

2)Imports of services

3)Interest , profits and dividends received

3)Interest, profits and dividends paid.

4)Unilateral receipts.

4)Unilateral payments.

CURRENT ACCOUNT BALANCE (1TO4)

5)Foreign Investments

5)Investments made abroad.

6)short term borrowing

6)short term lending

7)medium and long term borrowing.

7)medium and long-term lending

8)Errors and omissions

8)Errors and omissions.

CAPITAL ACCOUNT BALANCE (5 TO

9)Changes in reserves (+)

9)Changes in reserves (-)

TOTAL RECEIPTS                 =

TOTAL PAYMENTS

Thus, the balance of payments accounts is divided into

1)      Trade account

2)      Current account

3)      Capital account

Trade account :

Trade account balance is the difference between exports of goods and imports of  goods.

If the exports are more than imports, there will be a trade SURPLUS. On the other hand, if the imports are more than exports, there will be a trade DEFICIT.

The trade account balance is included in the current account.

(In 2008-09, India’s trade account balance showed a deficit of 118.6 billion (us $ )

Current account :

Current account balance is the difference between receipts and payments on current account.

It includes :

1)      Trade account balance.

2)      Services :

The net balance between exports and imports of services like banking, insurance, tourism, software, education, entertainments, etc is included in current account balance.

3)      Investment :

A country which lends money ( direct form / portfolio form ) receives profits, interest, and dividends.

However, a country which borrows money (foreign investment) usually pays, profits, interests and dividends. Thus the net balance between investment income received and investment income paid is included in current account balance.

4)      Unilateral flow :

Money received or given in the form of charity, donation, grants, gifts etc. which do not have counter obligations are known as unilateral receipts or payments.

The net balance between unilateral receipts and unilateral payments is included in current account balance.

The current account balance can show surplus or deficit. If the receipts are more than payments there will be current account SURPLUS, whereas, if payments are more than receipts, there will be current account DEFICIT.

{ In 2008-09, India’s current account balance showed a DEFICIT of 28.7 billion (us $ )}

Thus, current account balance is very significant as it shows a country’s earnings and payments in foreign exchange.

A surplus in current account balance is a very positive sign. However, current account deficit need not always convey negativity as higher payments made for productive purposes will help in earning higher GDP and it will lead to economic growth.

Capital account :

Capital Account balance is the receipts and payments on capital account.

It includes:

1)      Foreign Investment :

Foreign investment may be in direct form as undertaken by multi –national companies or individuals (who usually acquire houses in foreign countries ). Foreign investment may also be in port folio form and it refers to acquisition of financial assets (shares /bonds / securities ) in foreign countries.

Investment can be made for short term and for long-term.

The net balance between foreign investment received from abroad and

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