Check sibling questions

Different Types of Balance of Payment - Teachoo.JPG

What is Balance of payment Surplus?

It is total of surplus of current account and capital account

It leads to increase in foreign exchange reserves of country

Example 1

If there is current Account surplus of 100

There is Capital Account surplus of 200

Balance of Payment Surplus = 100 + 200 = 300

Suppose in beginning of year, foreign exchange reserves were 1000, Now they will become 1000 + 300 = 1300

 

Note-If one account is in surplus and other in deficit ,we take net figure

Example 2

If there is current Account deficit of 100

There is Capital Account surplus of 200

Balance of Payment Surplus = -100 + 200 = 200

Suppose in beginning of year, foreign exchange reserves were 1000, Now they will become 1000 + 200 = 1200

What is Balance of Payment Surplus - Teachoo.JPG

What is Balance of payment Deficit

It is total deficits of current account and capital account

It leads to decrease in foreign exchange reserves of country

Example

If there is current Account deficit of 300

There is Capital Account deficit of 400

Balance of Payment Deficit = 300 + 400 = 700

Suppose in beginning of year, foreign exchange reserves were 1000, Now they will become 1000 -700 = 300

 

Note-If one account is in surplus and other in deficit ,we take net figure

Example 2

if there is current Account deficit of 300

There is Capital Account surplus of 200

Balance of Payment Surplus= -300 + 200 = -100

Suppose in beginning of year, foreign exchange reserves were 1000, Now they will become 1000 -100 = 900

What is Balance of Payment Deficit - Teachoo.JPG

What is Balance of Payment Equilibrium?

If sum of current account and capital account equals 0, it is called Balance of Payment Equilibrium

In case of balance of payment equilibrium, there is no change in reserves

Example

If there is current Account Deficit of 300

There is Capital Account surplus of 300

Balance of Payment = -300 + 300 = 0

In this case,

Current account deficit has been financed by capital account and hence there is balance of payment equilibrium

Suppose in beginning of year, foreign exchange reserves were 1000, Now they will remain same (1000 + 0 = 1000)

What is Balance of Payment Equilibrium - Teachoo.JPG

Difference between Balance of Payment Surplus, Deficit & Equilibrium - Teachoo.JPG

What does Central bank do in Case of Balance of Payment Surplus - Teachoo.JPG

What does Central bank do in Case of Balance of Payment Deficit - Teachoo.JPG

WHAT ARE OFFICIAL RESERVE TRANSACTIONS?

They are transactions undertaken by Monetary Authority (Central Bank or RBI) to manage Official Reserves of

Foreign Exchange in case of Balance of Payment Surplus or Deficit.

What are Official Reserve Transactions - Teachoo.JPG

The reserves are drawn by selling foreign currencies in the exchange market during deficit,

foreign currencies are purchased during surplus.

 

When the official reserves increases or decreases, it is called overall balance of payments surplus and deficit respectively.

Example-Official Reserve Transactions - Teachoo.JPG

Importance of Official reserve Transactions in Balance of Payments:

1. Purchase of country's own currency is a credit item in Balance of Payment, while sale is a debit item.

2. It helps to adjust the deficit and surplus in Balance of Payments.

 

NCERT Questions

Question 2

What are official reserve transactions?

Explain their importance in the balance of payments.

View Answer

Other Books

Question 1

In the following questions, select the correct answers:

When receipts of foreign exchange are more than payment of foreign exchange, BOP is:

  1. Balanced
  2. Surplus
  3. Deficit
  4. None of these
View Answer

Oswaal Questions

Question 1

Read the news report given below and answer the questions that follow on the basis of the same:

NEW DELHI: India's balance of payments this year is going to be "very very strong" on the back of significant improvement in exports and a fall in imports, Commerce and Industry; Minister Piyush Goyal said on Monday.

 

He said that "good" green shoots are visible in the economy and exports have shown a "good" turnaround.

We are in July at about 91 per cent export level of July 2019 figures.

Imports are still at about 70-71 per cent level of July 2019.

So, broadly our balance of payments this year is going to be very very strong, which is why we feel confident that Indian industry will see opportunities for themselves, will see opportunities of growth, he said at a FICCI webinar.

India's exports fell for the fourth straight month in June as shipments of key segments like petroleum and textiles declined but the country's trade turned surplus for the first time in 18 years as imports dropped by a steeper 47.59 per cent.

The country posted a trade surplus of USD 0.79 billion in June. - "Balance of payments to be 'very, very strong' this year, green shoots visible in economy: Piyush Goyal" - The Economic Times - August 10th, 2020

 

Question 1

Why is India having a very strong Balance of Payments?

  1. Increase in Exports
  2. Decrease in Imports
  3. Both (A) and (B)
  4. Neither (A) nor (B)
View Answer

Question 2

Read the following statements - Assertion (A) and Reason (R).

Assertion (A): The country's trade turned surplus for the first time.

Reason (R): India's exports fell for the fourth straight month in June.

Select the correct alternative from the following:

  1. Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of the Assertion (A).
  2. Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of the Assertion (A).
  3. Assertion (A) is true, but Reason (R) is false.
  4. Assertion (A) is false, but Reason (R) is true.
View Answer

Consider the following statements:

(i) It will get a lot of investments.

(ii) The government can achieve its development goals.

(iii) Increase the GDP of the economy.

(iv) It is more profitable for the domestic manufacturers.

Which of the following is the true benefit of having a strong Balance of Payment:

  1.  i and iii only
  2. iii and iv only
  3.  i, iii and iv only
  4.  i, ii, iii and iv
View Answer

Question 4

_______________ is the situation when the imports of goods are more than the export of goods.

  1. Trade Surplus
  2. Trade Deficit
  3. Either (A) or (B)
  4. Neither (A) nor (B)
View Answer

Are ads bothering you?


Transcript

Different Types of Balance of Payment Capital Account Current Account It records Trade of Goods Trade of Services Unilateral Transfers It may have Current Account Surplus or Current Account Deficit It records Borrowings Investment Deposits It may have Capital Account Surplus or Capital Account Deficit Total of these 2 is Balance of Payment Surplus, Balance of Payment Deficit or Balance of Payment Equilibrium What is Balance of Payment Surplus Current Account Surplus Capital Account (Deficit) Total 1000 -600 400 Suppose, Opening Foreign exchange Reserve Add Balance of Payment Surplus/Deficit Closing balance 500 400 900 This is Positive So it is Balance of Payment Surplus BOP Surplus leads to increase in Foreign Exchange Reserves What is Balance of Payment Deficit Current Account Surplus Capital Account (Deficit) Total 1000 -1100 -100 Suppose, Opening Foreign exchange Reserve Add Balance of Payment Surplus/Deficit Closing balance 500 -100 400 This is Negative So it is Balance of Payment Deficit BOP Deficit leads to decrease in Foreign Exchange Reserves What is Balance of Payment Equilibrium Current Account Surplus Capital Account (Deficit) Total 1000 -1000 -100 Suppose, Opening Foreign exchange Reserve Add Balance of Payment Surplus/Deficit Closing balance 500 0 500 This is 0 So it is Balance of Payment Equilibrium BOP Equilibrium Leads to no change in Foreign Exchange Reserves Difference between Balance of Payment Surplus, Deficit & Equilibrium BOP Surplus BOP Deficit BOP Equilibrium Sum total of Capital & Current Account is Positive Sum total of Capital & current Account is Negative Sum total of Capital & current Account is 0 it leads to Increase in Forex Reserves it leads to decrease in Forex Reserves There is no change in Forex Reserves What does Central bank do in Case of Balance of Payment Surplus? Current Account Surplus Capital Account (Deficit) Balance of Account Surplus 1000 -600 400 Got has extra money of 400 it ask RBI to buy Foreign Exchange (Dollars) or Gold upto amount of Surplus This is called Official Reserve Transactions What does Central bank do in Case of Balance of Payment Deficit? Current Account Surplus Capital Account (Deficit) Balance of Account Surplus Got has shortage of 100 it ask RBI To sell Foreign Exchange (Dollars) or take loan from IMF, World bank This is also Official Reserve Transactions What are Official Reserve Transactions? OFFICIAL RESERVE TRANSACTIONS Undertaken by Central bank (not business) Related to Forex Reserves Buy or Sell Foreign Currency Or Gold Meaning of Official Reserve Transactions? They are transactions undertaken by Monetary Authority (Central Bank or RBI) to manage Official Reserves of Foreign Exchange in case of Balance of Payment Surplus or Deficit Example- Official Reserve Transactions Balance of Payment Surplus Balance of Payment Deficit Central bank either Buys Foreign Exchange or Buys Gold Central bank either Sells Foreign Exchange or Takes loan from IMF, World bank Note The Above Transactions are called Accommodating Transactions It is because these transactions are undertaken to Accommodate or manage Balance of Payment Surplus or Deficit and not for Profit Motive

CA Maninder Singh's photo - Expert in Practical Accounts, Taxation and Efiling

Made by

CA Maninder Singh

CA Maninder Singh is a Chartered Accountant for the past 12 years. He also provides Accounts Tax GST Training in Delhi, Kerala and online.