balance of payments

components of capital account

1. borrowings and lendings to and from abroad ‣ all transactions relating to borrowing from abroad by private sector, govt et. receipt of such loans is recorded on positive (credit side) ‣ all transactions of lending to abroad by private sector and govt. lending abroad and repayment of loans to abroad is recorded as negative (debit items). 2. investments to and from abroad ‣ investments by the rest of the world in shares of indian companies , such investments from abroad is recorded in positive (credit side) as they bring in foreign exchange. eg real estate india ‣ investment by indian residents in shares of foreign companies, such inv. to abroad is recorded in negative (debit side) as they lead to outflow of for. exchange eg. real estate abroad 3. change in foreign exchange reserves - the foreign exchange reserves are the financial assets of the govt. held in central bank. any withdrawal from reserves is recorded on positive/credit , any addition to these reserves in negative/debit side.

what are the components of current account

1. export and import of visible items - a major part of transactions in foreign trade is in the form of import and export of goods. balance of these visible exports and imports is known as BOT. 2. export and import of services - it includes a large variety of non factor services (invisible items) sold and purchased by the residents of the country to and from the rest of the world. 3. unilateral transfers - receipt of unilateral transfers from the rest of the world is shown in credit side, payments of unilateral transfers to the rest of the world is on debit side. 4. income receipts and payments to and from abroad - it includes investment income in the form of rent , interest and profit.

capital account is used to :

1. finance deficit in current account 2. absorb surplus of current account

categories of economic transactions

1. visible items - these include all types of physical goods which are imported and exported. They are called visible items as they are made of some matter and material and can be seen, felt or measured. 2. invisible items - these items refer to all types of services like banking, shipping, insurance etc. they are called invisible items as they cannot be seen, felt or measured. 3. unilateral transfers - these include gifts, personal remittances, and other one way transactions. since these transactions do not involve repayment, they're also known as unrequited transfers. 4. capital transfers - capital transfers relate to capital receipts and capital payments.

autonomous items are also known as

above the line items

define accommodating items

accommodating items refer to the transactions that are undertaken to cover the gap in the balance of payments, ie such transactions are undertaken to cover the surplus or deficit in autonomous transactions.

surplus in capital account

arises when credit items are more than debit items . it indicates net inflow of capital

deficit in capital account

arises when debit items ar more than credit items. it indicates net outflow of capital.

define autonomous items

autonomous items refer to those international economic transactions which take place due to some economic motive such as profit maximisation.

define balance of payment

balance of payment is an accounting statement that provides a systematic record of all economic transactions between residents of a country and the rest of the world, in a given period of time.

Define balance of trade

balance of trade (BOT) refers to the difference between the amounts of imports and exports of visible items. balance of trade = exports of goods - import of goods

BOT is also known as

balance of visible trade , trade balance

in an economic sense, BOP need not be always equal, it means BOP can be :

balanced BOP - when the receipts of foreign exchange are equal to payments of foreign exchange. surplus BOP - when receipts of foreign exchange is more than payments of F.E deficit BOP - BOP is in deficit when receipts of foreign exchange is less than payments of F.E

accommodating items are also known as

below the line items

Accommodating transactions take place in ___________ account

capital account

what is capital account

capital account of BOP records all those transactions, between the residents of a country and the rest of the world, which cause a change in assets or liabilities of the residents of the country or its government.

exports are entered as _____ in the BOP account

credit (positive) items

what does the two sides of a BOP account record

credit side - all inflows and sources of foreign exchange debit side - all outflows and uses of foreign exchange

what are the components of balance of payment

current account and capital account

what is current account

current account refers to an account which records all transactions relating to import and export of goods and services and unilateral transfers during a given period of time.

what are the two balances in current account

current account surplus (CAS) and current account deficit (CAD)

autonomous transactions take place on ____ and _____ accounts

current and capital

imports are entered as _______ in the BOP account

debit (negative) items

balance of payments accounting uses the _________ for recording transactions with the rest of the world.

double entry system

what are economic transactions

economic transactions refer to those transactions which involve the transfer of title or ownership of goods, services, money and asset.

the sources used to meet deficit in BOP are

foreign exchange reserves borrowings from IMF

what is surplus BOT

if a country exports more goods than what it imports, then the balance of trade is said to be in surplus ,ie, bot is favourable for the country

what is deficit BOT

if import of goods exceeds export of goods, then the country is said to have deficit bot. bot is unfavourable for the country.

what is the balance on current account

in current account. the receipts from export of goods, services and unilateral transfers is shown on the debit or positive items and payments for import of goods, services etc is shown on the credit or negative items. The net value of credit and debit balances is the balance of current account.

on current account, _____ and ________ are autonomous transactions

merchandise exports and imports of goods.

on capital account, ______ and _________ are autonomous transactions.

receipts and repayments of long term loans by private individuals.

who are included in residents? and who are not

residents of a country includes the individuals, firms and government agencies. residents do not include diplomatic staff, foreign military personnel, tourists, migratory workers and branches of foreign companies.

balance on capital account

the transactions which lead to inflow of foreign exchange like receipt of loans, sale of assets etc is recorded on the positive/ credit side of capital account. the transactions which lead to outflow of foreign exchange like repayment of loans, purchase of assets etc is recorded on the debit/ negative side. The net value of credit and debit balances is the balance on capital account.

what is current account deficit

‣ CAD arises when debit items are more than credit items. ‣ it indicates net outflow of foreign exchange ‣ it arises when value of imports of g,s & ut is more than export of g,s and ut. ‣ CAD signifies that the nation is a borrower from the rest of the world.

what is current account surplus

‣ CAS arises when credit items are more than debit items. ‣ it indicates net inflow of foreign exchange. ‣ it arises when value of exports of goods, services and ut. is more than import of goods, ser. and ut. ‣ CAS signifies that the nation is a lender to the rest of the world