Economic Policies and Tools Balance of Payments

Economic Policies and Tools

Balance of Payments

The balance of payments of a country is a systematic record of all economic transactions between the residents of the reporting country and the residents of foreign countries during a given period of time. It is an important index, which reflects the true economic position of a country, whether the country is a creditor country or a debtor country, and whether its currency is rising or falling in its external value. There are various types of monetary transactions that take place between two countries:

• The export and import of a goods and services
• The international lending and borrowing
• Servicing of foreign debts and their final repayments.

The balance of payment has two accounts, namely, current account and capital account. The following table shows the components of the current account.

Balance of Payments of India
Current Account			Rupees in Crores
		Credits	Debits	Net
I.	Merchandise
	(i) Private
	(ii) Government
II.	Non-monetary Gold Movements
III.	Invisibles
	(i) Travel
	(ii) Transportation
	(iii) Insurance
	(iv) Investment Income
	(v) Govt. not included elsewhere
	(vi) Miscellaneous
	(vii) Transfer Payments
	(a) Official
	(b) Private
Total Capital Account (I+II+III)

The items in the table are self-explanatory. One can see that the current account consists of visible exports and imports. The visible exports and imports are those, which are actually recorded at the ports.

The following table shows the components of the capital account.

Balance of Payments of India
Current Account			Rupees in Crores
		Credits	Debits	Net
I.	Private
	(i) Long Term
	(ii) Short Term
II.	Banking
III.	Official
	(i) Loans
	(ii) Amortisation
	(iii) Miscellaneous
Total Capital Account (I+II+III)

The above items are self-explanatory. The capital account reflects the real monetary position of a country in the international capital market.

Changes in the balance of payments produce deep repercussions on the functioning of the economy. A �surplus� in the balance of payment generally means an inflow of income into the country, more economic activity and more employment for the people. A deficit in the balance of payments, on the contrary, implies and outflow of income abroad, less of economic activity and less of employment at home.