Economics Ch - 12 Class 12th (Balance of Payment) Part - 1

  Ch - 12 (Balance of Payment) Part - 1

Balance of Payment (BOP) - It is a statement of account showing all the economic transactions of one country with the rest of the world.

BOP = Balance of visible trade + Balance of Invisible trade + Balance of Assets/Liabilities

      Significant / Importance of BOP :- 

1.) Financial status of the domestic economy :- BOP accounts reveal the financial status of the domestic economy in relation to the rest of the world. Borrowing reveals the dependence of the country on the rest of the world. It points to the backward of the economy.

2.) Market Potential :- BOP accounts reflect market potential in the domestic economy. It is reflected by the size of foreign investment larger size of foreign investment points to high market potential in the economy.

3.) Export and Import Status of Economy :- BOP account show export-import status of the country. Higher export points to higher GDP growth in the domestic economy. Import on the other hand, points to our dependence on rest of the world.

4.) Net factor income from abroad :- BOP data offers information on net factor income from abroad. It is an important component of national income.

5.) Monetary and Fiscal Policies :- BOP performance of a country impacts its monetary and fiscal policies. In the event of greater flow of foreign exchange from rest of the world, there is a pressure of demand for domestic currency. The RBI has to account for it in the formulation of its fiscal policies. Likewise, poor flow of foreign investment may point to hard tax laws in domestic economy. The government must account for it in the formulation of its fiscal policy.

        Components of BOP Account 

BOP account include -

1.) Current Account

2.) Capital Account 

3.) Official reserves Account

           Current Account  - 

Current account records receipts and payment of foreign exchange an account of such transactions which do not impact Asset and Liability status of a country in relation to the rest of the world.

1.) Export and Import of goods  :- Export and Import of goods is treated as Merchandise or Visible trade. This is a visible trade because goods are tangible and can be seen while crossing the borders.

Example - Export or Import of cellular phone can be seen while crossing the borders.

2.) Export and Import of Services  :- Export and Import of services is treated as invisible trade. This is invisible trade because services are intangible and can be seen while crossing the border. 

Example - Insurance services being rendered across the borders cannot be seen as crossing the border.

Services are further two types - 

a) Factor Services - These are those services which lead to factor payment or factor income. These are split as :

- investment income (rent, interest & profit)

- compensation of employees(wages).

b) Non - factor services - Non - factor services include all services other than factor services. Monetary transactions related to non - factor services are recorded as receipts when these services are exported and as payment when these services are imported.

Example - Insurance and Banking services.

Current Transfers - Current transfer refer to transfer for free. These are unilateral transfer made by way of gifts, grants and remittance( by the residents settled abroad).

1.) Visible Account / Trade Balance = X - M

2.) Invisible Account = Balance of factor services + Balance of non-factor services +                                                     Balance of Current transfer.

3.) Current Account = Visible Account + Invisible Account

4.) Goods and Services = Visible Account + Balance of non-factor services