Unit 5 Monetary System

BOP
The balance of payments (BOP) is the record of all international financial transactions
made by the residents of a country. There are three main categories of the BOP: the
current account, the capital account, and the financial account.
The balance of payment is the statement that files all the transactions between the entities,
government anatomies, or individuals of one country to another for a given period of
time. All the transaction details are mentioned in the statement, giving the authority a
clear vision of the flow of funds.
The balance of payments (BOP) transactions consist of imports and exports of goods,
services, and capital, as well as transfer payments, such as foreign aid and remittances.
A country's balance of payments and its net international investment position together
constitute its international accounts.
The three main categories are of BOP
• (a) The Current Account: Under this are included imports and
exports of goods and services and uni-lateral transfers of goods and
services.
• (b) The Capital Account: Under this are grouped transactions
leading to changes in foreign financial assets and liabilities of the
country.
• (c) The Reserve Account: In principle this is no different from the
capital account in as much as it also relates to financial assets and
liabilities. However, in this category only “reserve assets” are
included
Factors affecting the components of BOP
account
Exports of goods and services affected by following

• Imports of Goods and services
• Level of Domestic Income
• International prices
• Inflation rate
• Value of Domestic Currency
• Trade Barrier
Meaning of Balance of Payments
• Balance of Payments refers to the recording of all economic transactions of a given

country with the rest of the world. Each country has to enter into economic
transactions with other countries of the world. As a result of such transactions, it
receives payments from and makes payments to other countries. Balance of
payments is a statement of accounts of these receipts and payments
• According to Kindle Berger, “The balance of Payments of a country is a systematic

all economic transactions between its residents and residents of foreign countries”
• According to Benham, “Balance of Payments of a country is a record of the

monetary record of transactions over a period of time with the rest of the world.”...
Read more at: https://www.adda247.com/teaching-jobs-exam/balance-of-
payment/
Features of Balance of Payment
• Systematic Record: It is a systematic record of receipts and payments of a country

with other countries.
• Fixed Period of Time: It is a statement of account pertaining to a given period of
time, usually, one year.
• Comprehensive: It includes all three items, ie, visible, invisible and capital transfers.
• Double Entry System: Receipts and payments are recorded on the basis of the
double entry system.
• Adjustment of Differences: Whenever there is a difference in actual total receipts
and payments need for necessary adjustment is felt. In case of an unfavourable
Balance of Payments, the government will have to take foreign loans or promote
foreign investment, so as to meet the difference in the balance of payments.
• All items are included whether Government or Non-government: Balance of
payments includes receipts and payments of all items both government and non-
government.
Balance of Trade
• Balance of trade (BOT) is the difference between the value of a
country's exports and the value of a country's imports for a given period.
• If a country exports a greater value than it imports, it has a trade
surplus or positive trade balance, and conversely, if a country
imports a greater value than it exports, it has a trade
deficit or negative trade balance.
• Balance of trade constitutes imports and exports of goods. The
important features of the goods are that it must be visible, have physical
structure, size, shape and form. The goods must be seen and touched,
counted, measured and weighed
Causes of Disequilibrium in BOP
The main causes of unfavorable BOP in India are discussed as below:
• Import of machinery
• Import of war equipment
• Increasing demand of consumption goods
• Price Disequilibrium
• Expenditure on Embassies
• Competition from international countries
• Increasing prices of crude oil
• Payments of interest on foreign debts
• War among the gulf countries
Measures to Correct the Disequilibrium in BOP
• Promotion of exports
• Scaling up production
• Favorable trade agreements
• Encouragement of foreign investment
• Boosting foreign tourism
• Decreasing the level of economic inflation
• Devaluation of the Indian currency
• Restricting imports, specifically of luxury goods
• Exercising import substitution
Devaluation and Depreciation of Currency
• Devaluation is reduction in value of domestic currency by the
government under fixed exchange rate system.It is a deliberate effort.
On the other hand, Depreciation is decrease in value of domestic
currency due to market forces of demand and supply under flexible
exchange rate system.
What does Capital Account Convertibility mean?
• CAC means the freedom to convert rupee into any foreign currency
(Euro, Dollar, Yen, Renminbi etc.) and foreign currency back into
rupee for capital account transactions. In very simple terms it means,
Indian’s having the freedom to convert their local financial assets into
foreign ones at market determined exchange rate. CAC will lead to a
free exchange of currency at a lower rate and an unrestricted
movement of capital.

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BOP

Exports of goods and services affected by following

• Balance of Payments refers to the recording of all economic transactions of a given

• According to Kindle Berger, “The balance of Payments of a country is a systematic

• According to Benham, “Balance of Payments of a country is a record of the

• Systematic Record: It is a systematic record of receipts and payments of a country

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