Page 136 - DECO503_INTERNATIONAL_TRADE_AND_FINANCE_ENGLISH

International Trade and Finance

Notes Overall Balance of Payments
This is a sum of balance on Current Account and on Capital Account put together. It includes all
international monetary transactions of the reporting country vis-a-vis the rest of the world. It is highly
aggregative, and like any other highly aggregated variables, the concept (or the sums entered as
credit and debit under this item) cannot be of much significance. Because, the aggregate credit and
debit figures do not reveal the behaviour of change of the components which constitute the aggregate.
Take for instance, the question of surplus and deficit. Can we say that a surplus in the overall balance
of payments is a good sign or a deficit in the overall balance of payments is a bad sign ? We cannot
give sensible answers to these questions simply by reading the entries in the credit and debit columns
of the overall BOP row. We must not only know the extent of BOP overall surplus or deficit but also
the location of those surpluses or deficits. The answers can then be given something like these :
(i) If the overall surplus in the BOP was caused by current account surpluses but not capital account
surpluses, then the surplus may be a good sign for the country.
(ii) If the overall deficit in the BOP was caused by current account deficits rather than capital account
deficits, then the deficit may be considered as a bad sign for the reporting country.
In other words, if there is an overall surplus, we will have to first locate whether the surplus originated
in current account or capital account or both. The same will have to be done in case of a deficit in the
overall BOP. Therefore, the overall BOP figures by themselves, whether they indicate a surplus or a
deficit, do not reveal the real situation. For this reason not much economic significance can be attached
to the overall BOP concept. The current and capital account breakdown is very useful and significant.

Accounting Balance of Payments
The overall BOP entries (item E) in our Table 3 show a net surplus of $90 million (total credits of $800
million minus total debits of $710 million arising out of all the transactions in the five BOP accounts
above). This sum of $90 million surplus is entered into the International Liquidity (debit) Account.
The rationale behind this entry in the debit column is that, this sum of $90 million constitutes disposal
of that BOP surplus in any of the following ways (a) purchase or import of gold worth $90 million; or
(b) adding to the country’s stock of foreign exchange reserves of $90 million for future use; or
(c) extending short term loan of $90 million to other needy countries or buying some foreign income-
earning short term assets. There may even be some combination of (a), (b) and (c) as well. In any case
International Liquidity Account debit entry indicates a surplus in the overall BOP and the way it is
settled in or the other of the three methods states just above.
Having done that in the International Liquidity Account (item 6 in Table 3), what we then notice in
the Accounting BOP column (item F in Table 3) is an exact equality in the BOP debit and credit entries
to give us an accounting balance. Notice that the balance of payments must always balance in the
accounting or book-keeping sense. This is because for any surplus (or deficit) in the overall BOP
(item E in Table 3) there must be a corresponding debit (or credit) entry of the equivalent amount in
the International Liquidity Account such that the total credits and debits in the Accounting BOP item
must show an exact equality. Regardless of whether the country has an actual surplus or a deficit in its
overall BOP, there can be no surplus or a deficit in any country’s balance of payments in the accounting
sense. In other words, the balance of payments in the accounting sense is consistent with the surplus or
deficit which the country may have. International Liquidity Account cancels all the surplus or the
deficit in the BOP to give a zero accounting surplus or the deficit. Since “balance of payments must
always balance” there can, therefore, be no ‘imbalance’ in the BOP. Then what is the meaning of ‘deficit’
and ‘surplus’ in balance of payments ? If there can be no ‘imbalance’ then what is the meaning of
‘disequilibrium’ in the BOP ? Why do countries talk and worry about BOP ‘adjustment’ and BOP
‘settlement’ ? Now we will turn our attention to these and other related questions and distinctions.

11.4 Autonomous and Accommodating Transactions

A distinction is made between the autonomous and the accommodating or above the Line and below
the Line transactions in the BOP. The distinction is useful to define the concepts of ‘deficit’ and
‘surplus’ in the BOP.

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