Economics Tutorial #2
The Balance of Payments

The Balance of Payments (BoP) is the financial statement of account for the whole country. It records economic transactions (i.e. financial relations) between the economy as a whole and the rest of the world.

The BoP is the sum of two accounts:

1. The Current Account and
2. The Capital Account

The Current Account involves the import and export of goods and services as well as transfer payments. It is the sum of:

1. Net of Trade
2. Net of Remittances
3. Net of Tourism
4. Net of Services Payment
5. Net of Interest
6. Net of Profits

The Trade Account includes item 1. The Invisibles Account, so called because these accounts do not involve the physical movement of goods into and out of the country, includes items 2 to 6. The Current Account is said to be in deficit when it is negative and in surplus when it is positive.

The Capital Account deals with the movement of funds for investments and loans into and out of a country. It is the sum of:

1. Borrowings or Debt and
2. Investment or Capital

Borrowings include:

1. Official Aid
2. External Commercial Borrowing
3. Government Borrowing
4. Foreign Currency Non-Resident accounts
5. FII money in debt

Investments include:

1. FDI
2. FII money in equity
3. ADRs / GDRs
4. Acquisition of shares in M & A
5. Private Equity
6. Venture Capital

The latest figures for each of the above items can be found on the Reserve Bank of India’s website.

[Blogged from 26-2-05, my hostel room]