04 Balance of Payments.pdf

Balance of Payments  ▪ Periodic record of all economic transactions Meaning of BoP between the residents of a country and the rest of the world Features of BoP ▪ Systematic record ▪ Periodicity: prepared quarter...

Balance of Payments  ▪ Periodic record of all economic transactions Meaning of BoP between the residents of a country and the rest of the world Features of BoP ▪ Systematic record ▪ Periodicity: prepared quarterly or yearly ▪ Comprehensive: includes all external visible and invisible transactions of individuals, businesses and government ▪ Double entry system: credit and debit aspects ▪ BoP is credited when foreign currency is earned ▪ BoP is debited when foreign currency is spent Features of BoP (Contd.) ▪ 3 accounts: Current, Capital and Official Reserves Accounts ▪ Current Account: Transactions of goods (BoT), services and unilateral transfers ▪ Capital Account: Transactions of short and long-term financial assets ▪ Official Reserve Account: Gold, foreign currencies, SDRs. ▪ Balanced system: Balance in BoP is adjusted to the Official Reserves Account.  ▪ Periodic record of all visible exports and Balance of Trade imports between the (BoT) residents of the country and the rest of the world. Calculation of BoP ▪ Balance of Trade + Balance of Intangibles + Net Unilateral Transfers = Balance of Current Account ▪ Net Long-Term Investments + Net Short-Term Investments = Balance of Capital Account ▪ Balance of Capital Account + Balance of Current Account = Change in Official Reserves  Occurs when receipts and payments don’t match - either deficit BoP or surplus BoP. Surplus when receipts are greater than Disequilibrium payments, which is good. Balance in in BoP Official Reserves Account increases. Deficit when payments are greater than receipts, which is not good. Balance in Official Reserves Account decreases.  Economic factors Inflation Changes in foreign exchange rates Fall in foreign demand Business cycles Causes of BoP Population explosion Disequilibrium Political factors Social Factors Corrective Measures to BoP Deficit ▪ Automatic measures: Demand and supply free play ▪ Deliberate Measures: ▪ Monetary Measures: Monetary contraction, Devaluation of currency, Exchange control ▪ Trade Measures: Export promotion, Import control ▪ Miscellaneous Measures: Promotion of FDI, Obtaining loans and advice  ▪ The exchange of one currency for another or the conversion of one currency into another currency ▪ Also refers to the global Foreign Exchange market where currencies are traded virtually around the clock ▪ Usually abbreviated as "Forex" and occasionally as "FX"  ▪ The price of a nation’s currency in terms of another currency Exchange Rate ▪ It has two components, the domestic currency and a foreign currency Concepts Under Forex Rate Appreciation: When a currency becomes more valuable relative to another currency Depreciation: When a currency becomes less valuable relative to other currencies Devaluation: The deliberate downward adjustment to the value of a country's currency relative to another currency, group of currencies or standard Revaluation: deliberate upward adjustment to the value of a country's currency relative to another currency Forex Market ▪ The Forex market is where Participants currencies are traded ▪ Foreign exchange ▪ Global decentralized or over- dealers the-counter (OTC) market for the ▪ Individuals and firms trading of currencies, which ▪ Speculators and determines the foreign exchange arbitragers rate ▪ Central banks and ▪ The market incorporates all Treasuries arrangements used to buy and ▪ Foreign exchange brokers sell foreign exchange  Fixed Exchange Rate: Rate is set by the government or central bank at a particular rate for a period of time Types of Floating/Flexible Exchange Rate: Rate is determined purely by the demand and Exchange supply of that currency on the foreign exchange market Rates Managed Floating: This is where the currency is broadly managed by the forces of demand and supply, but the government takes action to influence the rate of change in the exchange rate