Balance of Payments | One shot | Chapter 12 | Macro economics | Class 12

Rajat Arora・2 minutes read

The Balance of Payment is an accounting statement that tracks economic transactions between a country and the rest of the world, encompassing visible goods, services, transfers, and capital. It consists of the current account (visible, invisible, unilateral transactions) and the capital account (capital transfers), with deficits in the former offset by the latter to maintain economic stability.

Insights

  • The Balance of Payments is a comprehensive accounting statement that tracks all economic transactions between a country and the rest of the world, encompassing visible goods, invisible services, unilateral transfers, and capital transfers, utilizing a double-entry system to record outflows on the debit side and inflows on the credit side.
  • Understanding the Balance of Payments is vital as it provides insights into a country's economic interactions globally, with a focus on the current account (visible, invisible, unilateral transactions) and the capital account (capital transfers), where deficits in the former can be addressed through borrowing, investment, or reserves, highlighting the pivotal role of the RBI in managing foreign exchange reserves to balance accounts effectively.

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Recent questions

  • What does the Balance of Payment record?

    Economic transactions between residents and the world.

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Summary

00:00

Understanding Balance of Payment in Economics

  • Balance of Payment is an accounting statement that records all economic transactions between residents of a country and the rest of the world.
  • Economic transactions include visible goods (tangible items), invisible services (intangible services), unilateral transfers (gifts, grants), and capital transfers.
  • The balance of payment follows a double-entry system, with outflows recorded on the debit side and inflows on the credit side.
  • It is a flow concept, covering transactions within a specific year starting on April 1st and ending on March 31st.
  • The balance of payment consists of two main parts: the current account (visible, invisible, unilateral transactions) and the capital account (capital transfers).
  • The balance of trade is the difference between a country's exports and imports of goods, with a surplus indicating more exports than imports and a deficit indicating the opposite.
  • The current account balance is calculated by summing up the values of exports, imports, and other transactions, with a surplus denoting a positive balance and a deficit indicating a negative balance.
  • The balance of payment is divided into the current account and the capital account, with the former representing the balance of visible, invisible, and unilateral transactions, and the latter focusing on capital transfers.
  • A positive balance in the current account signifies a surplus, while a negative balance indicates a deficit, reflecting the overall economic position of a country.
  • The balance of payment is crucial for understanding a country's economic interactions with the rest of the world, providing insights into trade balances, financial flows, and overall economic health.

18:00

Managing Current Account Deficits and Capital Accounts

  • Balance current account can be positive (Ch) or negative (CID).
  • To address a deficit in the current account, a capital account is created.
  • Options to address a deficit include borrowing, seeking investment, or using reserves.
  • RBI, as the custodian of foreign exchange reserves, plays a crucial role in balancing accounts.
  • The capital account is utilized to absorb extra funds or complete deficits.
  • The balance of trade is a subset of the current account, focusing solely on goods.
  • The balance of payments encompasses goods, services, unilateral transfers, and capital transactions.
  • The balance of payments is larger than the balance of trade due to its comprehensive nature.
  • The capital account involves transactions that do not directly impact income, output, or employment.
  • Different types of investments include FDI (direct control) and FII (no direct control).

32:28

Balancing Errors in International Transactions

  • Errors and Omissions is a balancing item in the Balance of Payments, reflecting inaccuracies in recording international transactions, serving to rectify discrepancies between the Current and Capital Accounts.
  • The Current Account displays the net income of an economy by recording all transactions, with deficits in the Current Account being offset by surpluses in the Capital Account, emphasizing the importance of understanding Autonomous and Accommodating Transactions in balancing the accounts effectively.
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