Balance of Payments Flashcards
What is balance of payment?
accounting statement which gives a systematic record of all the economic transactions between residents of a country and the rest of the world in a given period of time (usually, one year)
Who are not included in residents?
branches of foreign companies, foreign military personnel, migratory workers etc
What are economic transactions?
transactions which involves transfer of the title or ownership of goods, services, money and assets
Economic activities are broadly classified under _______
unilateral transfers
visible items
invisible items
capital transfers
How are visible items differentiated from invisible items?
Visible items are all types of physical goods that are exported and imported, they are made of matter or material that can be touched, measured and seen (can be verified by custom officials
Invisible items are all types of services that cannot be seen, touched or measured like shipping, insurance and banking
Unilateral transfers include ______, ______ and other _______
they include gifts, personal remittances and other “one way transactions”
Unilateral transfers are also called ____
unrequited transfers as there is no claim for repayment
What are capital transfers?
They are capital receipts (borrowings and sale of assets) and capital payments (capital repayments and purchase of assets)
The structure of balance of payments is _______
double entry system
has two sides, credit (inflow) and debit (outflow)
In accounting sense, BOP is _____
In economic sense, BOP is _____
always balanced
not always equal
BOP can be balanced, surplus and deficit. Explain.
Balanced BOP: when receipts of foreign exchange is equal to payments of foreign exchange
Surplus BOP: when receipts of foreign exchange is more than payments of foreign exchange
Deficit BOP: when receipts of foreign exchange is less than payments of foreign exchange
BOP is a flow/stock concept. Give reason.
it is a flow concept as it is measured over a period of time
Balance of trade is _____
it is the difference between amounts of exports and imports of visible goods
BOT = X - M
How are exports and imports entered into the BOP account?
exports are recorded in the credit side
imports are recorded in the debit side
___ is a part of BOP and plays a crucial role in deciding overall situation of BOP of a country
Balance of Trade (BOT)/ Balance of Visible Trade/Trade Balance
What is surplus BOT?
What is deficit BOT?
if a country exports more than it imports, BOT is in surplus (favourable)
if a country imports more than it exports, BOT is in deficit (unfavourable)
BOT includes ____ items
only visible
Differentiate btwn BOT and BOP on the basis of components, capital transactions, scope and settlement
components - BOT (has visible items) BOP (has visible,invisible,unilateral and capital transfers)
capital transactions - BOT (does not record any transaction of capital nature) BOP (records all transactions of capital nature)
scope - BOT (narrower concept as its part of BOP) BOP (wider concept as it includes BOT)
settlement - BOT (unfavourable BOT can be met out of favourable BOP) BOP (not possible here)
All transactions of BOP can be grouped into
current A/C and capital A/C
What is current A/C?
account which records all transactions relating to X and M of goods and services and unilateral transfers during a gn period of time
What is capital A/C?
account which records all transactions between residents of a country and the rest of the world which causes change in assets/liabilities of the residents of the country or its govt
What are the main components of current A/C?
merchandise transactions/visible trade (X and M) invisible trade (X and M) unilateral transfers to and from abroad (one sided transactions) income receipts and payments to and from abroad (investment income in the form of int, rent and profit)
What is recorded in the debit (negative) side of current A/C?
payment of imports of visible goods
payment of imports of invisible goods
unilateral transfers to the rest of the world
income payments to the rest of the world
What is recorded in the credit (positive) side of current A/C?
receipts from export of visible goods
receipts from export of invisible goods
unilateral transfers from the rest of the world
income receipts to the rest of the world
Assertion : Current A/C shows the net income generated by the foreign sector
Reason : Current A/C records all transactions that affect the income, output and employment of the country
both assertion and reason are true and reason is the correct explanation for assertion
Current A/C records all transactions that affect the _______ of the country
income, output and employment
The ________ of credit and debit balances is the balance of current A/C
net value
Current Account Surplus arises when _____
credit items are more than debit items
there is net inflow of foreign exchange
value of X of goods and services is more than value of M of goods and services
signifies nation is a lender
Current Account Deficit arises when ______
debit items are more than credit items
there is net outflow of foreign exchange
value of X of goods and services is less than value of M of goods and services
signifies nation is a borrower
What is Capital A/C used for?
to finance deficit in current account
absorb surplus of current account
What are the components of Capital A/C?
borrowings and lendings to and from abroad
investments to and from abroad
change in foreign exchange reserves
Investments to and from abroad includes two types of investments. What are they?
foreign direct investment (FDI) it is the purchase of an asset such that it gives control to the purchaser over the asset
portfolio investment : it is the purchase of an asset, such that it does not give any direct control over the asset to the purchaser (includes foreign institutional investment (FII)
________ are the financial assets of the govt held in the central bank
foreign exchange reserves
Change in reserves in recorded in the ____ account not the ____
BOP, not the reserves
What is recorded in the credit (positive) side of capital A/C?
loans from abroad and repayment of loans from abroad
investments by the rest of the world in shares of Indian companies, real estate
withdrawal from foreign exchange reserves
What is recorded in the debit (negative) side of capital A/C?
lending abroad and repayment of loans abroad
investments to the rest of the world by Indian residents
addition to foreign exchange reserves
Surplus in capital account arises when _______
credit items are more than debit items (inflow of foreign exchange)
Deficit in capital account arises when _______
debit items are more than credit items (outflow of foreign exchange)
What is another element in BOP other than current and capital A/C?
Errors and Omissions, it is the balancing item that reflects the inability to record all international transactions accurately
Balance on current account and balance on capital account are interrelated. Explain.
deficit in current account should be settled by surplus in capital account
surplus in current account must be matched by the deficit in capital account
Current account is a ______ concept
Capital account is a ______ concept
flow concept as it includes all items of flow nature
stock concept as it includes all items of stock nature
Capital account brings a change in ______ while current account brings a change in ________
capital account brings a change in country’s level of income while current account brings a change in capital stock of the country
What are autonomous items?
international economic transactions which take place for an economic motive like profit maximization
also called ‘above the line’ transactions
it takes place on both current and capital accounts
What are accommodating items?
international economic transactions that are undertaken to cover the gap in BOP (surplus or deficit in autonomous transactions)
also called ‘below the line’ transactions
only capital account
Accommodating items are _________ which are meant to correct the disequilibrium in autonomous items in BOP
compensating capital transactions
In the current account, _____ and _____ are autonomous transactions
In the capital account, _____ and _____ are autonomous transactions
merchandise exports and imports in current account
receipts and repayments of long term loans by private individuals in capital account
What are the sources used to meet a deficit in BOP?
reducing foreign exchange reserves
borrowings from IMF or foreign monetary authorities
Autonomous items are ______ of the state of BOP account
independent
BOP account is in _____ when autonomous receipts are more than autonomous payments
surplus
What are official reserve transactions?
transactions carried on by monetary authorities of a country which causes changes in official reserves
What does the central bank use the surplus for?
to purchase foreign securities, foreign currency, gold etc to increase reserves in the nation
