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ALLIANCE UNIVERSITY,MARKETING-C,GROUP11
MICROECONOMICS PRESENTATION (Under the guidance of Prof.Samik Shome)
A balance of payments (BOP) sheet is 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 of goods, services, financial capital,& financial transfers.
The BOP summarizes international transactions for a specific period. prepared in a single currency,
ALLIANCE UNIVERSITY,MARKETING-C,GROUP11
Record of nation’s international transactions.
Keeps a track of incoming and outgoing money.
Shows whether a country is a net borrower or net lender.
It is one of a concern of a nation for its economic growth
SIGNIFICANCE
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Current account. Trade account-visible. Services-invisible. Income-invisibles. Unilateral transfers-invisibles. Financial account or Capital account. Statistical discrepancy or accommodating
capital transactions.
Balance of payments accounts-
ALLIANCE UNIVERSITY,MARKETING-C,GROUP11
Current account- It is the sum of the balance of trade (net earnings on
exports – payments for imports) , factor income (earnings on foreign investments – payments made to foreign investors) and cash transfers
entries under Current account might include- Trade – buying and selling of goods and services
◦ Exports – credit entry◦ Imports – debit entry
Trade balance – the sum of Exports and Imports Factor income – repayments and dividends from loans and
Adjustments of exchange rates: An upwards shift in the value of a nation's currency
relative to others will make a nation's exports less competitive and make imports cheaper and so will tend to correct a current account surplus. It also tends to make investment flows into the capital account less attractive so will help with a surplus there too. Conversely a downward shift in the value of a nation's currency makes it more expensive for its citizens to buy imports and increases the competitiveness of their exports, thus correcting a deficit.
BALANCING MACHANISM-
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Nations can agree to fix their exchange rates against each other, and then correct any imbalances that arise by rules based and negotiated exchange rate changes and other methods
Rules based rebalancing mechanisms
Account Net balance
Merchandise -$214710
Services $38,175
Income $30,835
Unilateral transfers -$28,390
CURRENT ACCOUNT -$174,091
FINANCIAL ACCOUNT $116,187
Statistical discrepancy -$39,487
Simplified U.S balance of payments,2008
ALLIANCE UNIVERSITY,MARKETING-
C,GROUP11
ALLIANCE UNIVERSITY,MARKETING-C,GROUP11
IMPACT IN INDIAN ECONOMY-
India facing BOP disequilibrium since Indipendence,culminating a disaster in 1990-91.
It was always under pressure & had a huge deficit due high import of food grains & goods, heavy external borrowing, payments & poor export.
Govt implied Protectionist policies(1956-61) to boost domestic Industrialization as an import substitution, thus enhancing the export.
But high degree of protection in Indian industries led to inefficiency & poor product to compete with the world market as well as in Indian market too.
Lack of competition & higher production cost also led to poor export. To curb the BOP imbalance out of panicky,Govt resorted large scale foreign borrowings for its developmental efforts which backfire Indian economy as debt service obligations rose sharply.
ALLIANCE UNIVERSITY,MARKETING-C,GROUP11
An economic recovery from 1968–69, however, eased the problem, and by September 1970, foreign exchange reserves amounted to $616 million, as compared with $383 million by December 1965. Reserves declined to $566 million by the end of 1972 but increased to $841 million as of 1975.
Indian export was dependent on world trade situations, as we were basically primary product exporters, the earnings was low & unstable, the quality was low too.
The instability of the exchange value was also a problem for Indian export,govt had strongly an inward looking policy.
The process of liberation started form mid 80s,restriction on certain Imports were removed, but the situation was already out of hand which led to 1990-91 crisis. Today although we have BOP imbalances its devolved and more productive than last decade.