Balance Of Trade $$ Balance Of Payment | Study Notes

The price of anything is the amount of life you exchange for it.

Balance Of Trade  $$ Balance Of Payment  

*explained in context of India.

The Most Important Point which needs to be considered in the whole explanation is - Balance of Trade(BOT) Is a part of Balance of Payment (BOP)

 

Basically,
When India's foreign investment is concerned, we have to look at 3 things -

* export-import of visible items,
* export-import of invisible items( services), &
* export-import of capital receipts & payments.  

• The first case of "export-import of physical (visible) goods" - the difference is called Balance of Trade

• When all above 3 cases are concerned, it is called Balance of Payments.

Now BoP is of 2 types:

1.   Current account balance :

This includes:

a) Transactions of physical goods;
   ~~ exports : +ve , bcoz they bring foreign exchange into India
   ~~ imports : -ve , bcoz they cause flow of foreign exchange outside India

b) Transactions of services ( same : export +ve, import -ve)

c) Unilateral transfers;

  ~~ from other countries into India - like remittances received from NRI's + money spent by foreign   tourists in India + "interest" received on the loans given to foreign countries + "profits" earned on the assets that we own in other countries.
 

*Pls pay attention on the term "profit". It is not the principal amount that we use to set up out assets.

Or,

  ~~to other countries from India - like remittances by the ones working here to their home countries + money spent by the Indians who travel abroad + "interest" we pay on loans that we take from foreign + "profits" that foreign country earns on their assets here in India.

Summing all three above,
When the net flow of money is inside India, it is called Current Account Surplus.
When net flow of money is outside India, it is called Current Account Deficit.

   

       2.  Capital account balance :

It includes transactions relating to purchase and sale of :

• foreign assets( buildings ,land, production units set up abroad, loans given by Indian banks to foreign owners - these loans being asset to us as we will get back the principal amount wid interest, and a liability for the foreign borrower) 
• foreign liabilities ( buildings ,lands , production units set up by foreign companies in India + the loans taken by Indians from the foreign banks) during a year.                                         

These can be summarized as below :                                                                                                

a) foreign investment - FDI, FPI ,FII                                                                                           

b) loans - taken by govt & pvt sector from international money market at market interest rates or/and borrowing from countries as a means of aid/assistance with low interest rates                 

c) transactions by banks for their assets & liabilities in foreign exchanges over an year.           

d) foreign exchange reserves                                                                                                         

e) balancing items that are done to correct any errors made in accounting.