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Dilfraz Singh, Lovely Professional University Unit 11 : Balance of Payments and Balance of Trade : Meaning and Components

Unit 11 : Balance of Payments and Balance of Trade : Notes
Meaning and Components

CONTENTS
Objectives
Introduction
11.1 Meaning of Balance of Payments
11.2 Components of Balance of Payments
11.3 Meaning of Balance of Trade
11.4 Autonomous and Accommodating Transactions
11.5 Summary
11.6 Key-Words
11.7 Review Questions
11.8 Further Readings

Objectives

After reading this Unit students will be able to:
• Know the Meaning of Balance of Payments and Balance of Trade.
• Explain the Components of Balance of Payments.
• Describe Autonomous and Accommodating Transactions.
Introduction

Balance of payments accounts are an accounting record of all monetary transactions between a country
and the rest of the world. By the principles of double entry book-keeping method, monetary receipts
are recorded in the credit side of the account and payments in the debit side. The two principal parts
of the BOP accounts are the current account and the capital account. The current account shows the
net amount a country is earning if it is in surplus, or spending if it is in deficit. The capital account
records the net change in ownership of foreign assets. It includes the foreign exchange reserve account,
along with loans and investments between the country and the rest of world. Balance of payments in
accounting sense should always balance. But that does not imply that the balance of payments will
always be in equilibrium — present liabilities are perfectly matched by the present asset positions of
the country with respect to the rest of the world. To understand this, one has to understand three
basic balances — merchandise trade balance, service trade balance and current account balance.
We often hear that the less developed countries (LDC’s) suffer from adverse balance of payments
and consequently experience chronic 'foreign exchange gap.’ Persistent balance of payments (BOP)
deficits have forced countries to resort to corrective measures like currency devaluation, imposition
of tariffs, exchange controls, contractionary monetary and fiscal policies and exchange controls of
various sorts. Even the so-called developed countries have been no exception to this tendency. Policies
of import substitution and export promotion to achieve external balance (or balance of payments
equilibrium) have led to serious problems of growth and trade for the countries of the world.
11.1 Meaning of Balance of Payments

The BOP is one of the oldest and the most important statistical statement for any country, especially
the more open economies. Put in a nutshell the BOP of any country is “a systematic record of all

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