What is Balance of Payments India Theory Notes, Capital Account Deficit vs Current Account Deficit, PPT, PDF

Balance of Payment:

It reflects the way in which economic interaction takes place between one nation to rest of the world. Balance of payments is one of the major indicators of a country status in international trade. It reflects all payments and liabilities to foreigners  and all payments and obligations received from foreigners.  The BOP is determined by the country  exports and imports of goods, services, and financial capital, as well as financial transfers.

Components of Balance of Payments:

It has three components:

1.    Current Account: It shows the short term international transaction between a nation and rest of the world like Export and import of goods and services, net remittances. It is also called as Visible trade.

2.    Capital Account: It deals in long term transaction between a nation and rest of the world like FDI,FII. It is also known as Invisible trade which includes trade in services like tourism, transport, banking, etc.

3.    International Reserves Account: It is the balancing item when Capital and Current account deficits. Official reserves assets include gold reserves, foreign currencies (US dollar, European Euro, Japanese Yuan, etc.), SDRs. 

Balance of Payment Crisis:

If international reserves (forex reserves) of a country are not enough to balance the combined

current account deficit and capital account deficit then it is said to be Balance of Payment Crisis.

Current Account Deficit: When total export exceeds the total import then it is called as Current Account Deficit.

Capital account Deficit: An imbalance in a nation's balance of payments capital account in which payments made by the country for purchasing foreign assets exceed payments received by the country for selling domestic assets.

Measures to Control Balance of Payment crisis:

1.    Encourage Exports

2.    Discourage imports like Gold, Fuel

3.    Contractionary Fiscal and Monetory Policy

4.    Encourage FDI,FPI

5.    Currency Devaluation

NOTE: Do not get confuse between Current Account Deficit and Current Account convertibility

Current Account convertibility means the freedom to convert one currency into other internationally accepted currencies wherein the exporters and importers where allowed a free conversion of rupee. But still none was allowed to purchase any assets abroad.

Capital Account Convertibility means that rupee can now be freely convertible into any foreign currencies for acquisition of assets like shares, properties and assets abroad. Further, the banks can accept deposits in any currency.

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