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WEL-COME

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Presenters:

Suresh Naidu

Latha NaiduShilpaRavi.kShankar

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SYNOPSIS Introduction.

Meaning and Definition of BOP.

Uses of BOP.

Factors affecting BOP.

Present calculation of BOP.

How to calculate BOP.

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INTRODUCTION In the modern world there is hardly any country

which is self sufficient, in sense that it can produceall goods and services it needs.

Every country imports from other countries thegoods that cannot be produced at all in country orcan be produced only at an unduly high cost ascompared to foreign supplies.

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Meaning of Balance of PaymentIt is a systematic record of all the transactions

made between one particular country and all other countriesduring a specified period time.

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Definition of Balance of paymentIt is defined as an accounting record of all

monetary transactions between a country and the rest of the world.These transactions include payments for the country's exports and

imports ofgoods, services, financial capital, and financial

transfers.

http://en.wikipedia.org/wiki/Good_%28economics_and_accounting%29http://en.wikipedia.org/wiki/Service_%28economics%29http://en.wikipedia.org/wiki/Financial_capitalhttp://en.wikipedia.org/wiki/Transfer_paymentshttp://en.wikipedia.org/wiki/Transfer_paymentshttp://en.wikipedia.org/wiki/Transfer_paymentshttp://en.wikipedia.org/wiki/Transfer_paymentshttp://en.wikipedia.org/wiki/Financial_capitalhttp://en.wikipedia.org/wiki/Service_%28economics%29http://en.wikipedia.org/wiki/Good_%28economics_and_accounting%29

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USESOFBOPIncome growth.

Relationships between trade in goods & services & directinvestment flows.

Links between the exchange rate of different currencies.

International banking transactions.

Financial market developments.

External debt situation.

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FACTORSAFFECTINGBOPExports of goods and services:

The prevailing exchange rate of the domestic currency.

Inflation rate.

Income of foreigners.

Trade barriers.

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The privileging exchange rate of the domesticcurrency:-

A lower value of the domestic currency results in the domesticprice getting translated into a lower international price.

Inflation rate:-

The inflation rate in an economy vis-a-versa other economyaffects the international competitiveness of the domestic goods andtheir demand. The inflation lowers the competitiveness and lowersthe demand for domestic goods.

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Income of foreigners:-There is a positive co-relation between income of the residence of

an economy to which the domestic goods are exported.

Trade barriers:-

The trade barriers erected by the other economies against the

exports of a country. Lower will be the demand for its exports a hence,for its currency.

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Imports of goods and services:-

Value of the domestic currency.

Level of domestic income.

Inflation rate.

Income on investment.

Trade barriers.

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Value of domestic currency:-

An appreciation of the domestic currency results in

making imported goods and services. Cheaper in terms of

domestic currency.

Level of Domestics Income:-An increased in the level of domestic income

increases demand of all goods and services.

Inflation rate:-A domestic inflation rate that is higher than the

Inflation of other economies would result in imported goods

and services be relatively cheaper than domestically produced.

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Income on investment:-

Both payment and receipts on of interest, dividend profitetc. Depend on the level of past investments and the current rate of

return that can be earned in an economy.

Trade barriers:-

Have the same effect on import exports higher the

barriers lower the imports and hence lower the supply of domestic

currency.

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Present Calculation of BOP The balance of current account gives us information regarding a

countrys deficit or a surplus condition.

If there is a deficit, does that mean the economy is weak?

Does a surplus automatically mean that the economy is strong?

Not necessarily.

But to understand the significance of this part of the BOP, weshould start by looking at the components of the current account:Goods, Services, Income and Current transfers.

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Goods:-These are movable and physical in nature, and in order

for a transaction to be recorded under "goods", a change ofownership from/to a resident (of the local country). Movablegoods include general merchandise, goods used for processingother goods. Exports are marked as a credit (money coming in)and imports are noted as a debit (money going out).

Services:-These transactions result from an intangible action such

as transportation, business services, tourism, or licensing. Ifmoney is being paid for a service it is recorded like an import (adebit), and if money is received it is recorded like an export(credit).

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Income:-

Income is money coming in (credit) or going out

(debit) of a country from salaries, portfolio investments (in the

form ofdividends, direct investments or any other type of

investment. Together, goods, services and income provide an

economy with fuel to function.

Current Transfers:Current transfers are unilateral transfers with nothing

received in return. These include workers' remittances, donations,

aids and grants, official assistance and pensions. Due to theirnature, current transfers are not considered real resources that

affect economic production.

http://www.investopedia.com/terms/d/dividend.asphttp://www.investopedia.com/terms/d/dividend.asp

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Calculation of Balance of PaymentThe balance of payment is an economic concept that compares

the transactions of the people in one country to the transactions of

those in another country.

Essentially, balance of payments looks at imports and exports.

If a country has a positive balance of payment, then that country

will have more cash inflow into the country than cash out flow.

If a country has a negative balance of payments, then that country

will have more cash outflow than inflow.

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CONTD..

The following variables go into the calculation of theCurrent Account Balance (CAB):

CAB = X - M + NY + NCT

where,

X = Exports of goods and services.M = Imports of goods and services.NY = Net income abroad.

NCT = Net current transfers.

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CONCLUSIONIf imports & exports are to be made between two or more

countries, all the economic factors like inflation rate, interest

rate, political stability should be balanced.

BOP helps in balancing the above said factors.

BOP plays a very important role in knowing overall economic

performance of a country.

A negative BOP indicates that more money is flowing out of thecountry than money coming in and vice-versa.

BOP may be used as an indicator of economic and political

stability.

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