INDIAN SCHOOL BOUSHER

CBSE Affiliation Number: 6630203 & School Code 90252

ACADEMIC YEAR 2024 - 2025

BALANCE OF PAYMENT
SUBJECT: ECONOMICS RESOURCE PERSON: JP MISHRA
GRADE: XII WORKSHEET & REVISION EXERCISE
DATE: ___________ NAME OF THE STUDENT: ________________________ SECTION: ______

SL.N
QUESTIONS AND ANSWERS
O
1 What is BOP?

 BOP is an accounting statement of all economic transactions

between a country and rest of the world in a fiscal year.
 It is a flow concept.
 Economic transactions include:-
VIU-C
 Visible items
 Invisible items
 Unilateral transfers
 Capital transfers

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2 Explain the double entry system of a BOP statement.

BOP > CURRENT A/C > BOT

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 The balance of payments account of a country is constructed on the
principle of double-entry bookkeeping.

Each transaction is entered on the credit and debit side of the balance
sheet.

Thus, the total debit and the total credit of the balance of payments are
always equal.

Hence it is for this reason that balances of payments for a country must
always balance in accounting sense

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3 Differentiate BOP and BOT.

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4 What are the components of Current a/c and capital a/c of BOP?

Components of Current a/c Components of Capital a/c

Introduction: Introduction:
It is that account in BOP which Components of Capital a/c in
records exports and imports of BOP are foreign
goods, services and investments,
unilateral transfers. borrowings/loans and
change in foreign exchange
reserves.
1. All export of goods are 1. Foreign investments has 2
recorded as credit items (+) components:-FDI &FII
because of inflow of foreign (Portfolio Investment)
exchange. FDI/FII by non-residents of our
On the contrary, all imports of country are recorded in credit
goods are recorded as debit items as it results in inflow of
items as it results in outflow of forex to our country.
forex from our country. On the contrary, FDI/FII by
resident in rest of the world is
recorded as debit item, as it
results in outflow of forex from
our country.

2. It records exports and imports 2. Borrowings/loans have 2

of services (invisibles) which components:-
doesn’t cross any borders and Commercial borrowings
splits into factor services and which are done by private
non-factor services (shipping, sector and government from
insurance, banking). internal/foreign markets.
Borrowings form IMF and
All exports of services are world banks: All borrowings
recorded under credit side as it are debt creating capital
results in inflow of forex, transactions recorded in credit
whereas all imports of services side as it leads to inflow of
are recorded under debit side as forex to country. On the
it results in outflow of forex. contrary, loan to rest of the
world is recorded under debit
side as it leads to outflow of
forex.
3. It records unilateral transfers 3. Change in forex reserve/
by way of gift, donation, aids and official reserve:-
scholarships. All receipts of A change in forex reserve
unilateral transfers are recorded affects BOP.
under credit side as it results in Withdrawal form Reserve
inflow of forex while all banks is considered as inflow of
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 payments of unilateral transfers currency so kept under credit
are recorded under debit side as side. (inflow)
it results in outflow of forex. The addition of forex to RBI is
considered as debit items.
(outflow)
4. Does not affect the asset and 4. Affects the asset and liability
liability position of the country. position of the country.

5. It is a flow concept. 5. It is a stock concept.

5 Explain the equilibrium and disequilibrium of BOP.

Equilibrium in BOP:
Current account balance + Capital account balance = 0
There is no movement of official reserves of the Central Bank
i.e. inflow of foreign exchange = outflow of foreign exchange.

Disequilibrium in BOP:
When current account Balance + Capital account Balance is not equal to
zero. (It may be Positive and Negative).
(i) Surplus BOP: Here autonomous receipts are more than the
autonomous payments.
(ii) Deficit BOP: Here autonomous receipts are less than the
autonomous payments.
BOP is always balanced, in case there is imbalance, it is corrected
through accommodating transactions.

6 What is the difference between Autonomous and

Accommodating transactions?
Autonomous Accommodating
Basis
transactions transactions

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 It refers to international They are transactions which
transactions which take place to cover deficit
occurs due to some or surplus in autonomous
economic motive such transactions.
Meaning
as profit maximization. Eg: Withdrawal from foreign
Eg: Import of machinery exchange reserve, loan
form Japan, FDI etc. from IMF etc to maintain
BOP.
These items are These items are dependent
Nature independent in nature. in nature.
These items take place These items take place only
Account in current and capital in capital a/c.
a/c.
These items are also These items are also known
known as above the line as below the line items as
items as they are they are recorded as
Alternative
recorded as first items secondary items after
names
before calculating calculating surplus or
surplus or deficit. deficit.

7 What causes Disequilibrium of BOP in the economy?

 Disequilibrium in BOP arises in the form of surplus or deficit in
BOP.
 BOP disequilibrium is a serious issue for policy makers
 A chronic BOP deficit leads to downgrading the economy in the
world community.
These occur due to the following reasons:-
 Economic Factors
 Large scale developmental expenditure
 Cyclical fluctuations in general business activity
 Higher rate of inflation in domestic country
 Change in the pattern of demand by the people
 Political Factors
 Political instability may cause large scale capital outflow
 Changing government policies due to political disturbances
causes loss of faith of investors
 Social Factors
 Change in taste, preference and fashion may affect imports
and exports
 Demonstration effect leads to higher imports

8 BOP always balances. Elucidate.

BOP always balances. This statement can be proved from the following
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 arguments:-
 BOP is based on the principles of Double Entry Book Keeping
Systems.
 Accordingly each transactions have dual entries (Contra entries).
 Each credit/debit entry has its equal size of debit/credit entry.
 Hence the overall balance is zero.
 So BOP always balances in accounting sense.
 In operational sense it may not be. It may be surplus or deficit.

SL.N REVISION EXERCISE

O
1 BOP is measured as:
(a) difference between visible items of exports and imports
(b) difference between invisible items of exports and imports
(c) difference between external and internal flow of gold
(d) difference between all receipts of foreign exchange and payments of
foreign exchange

2 Difference between the values of imports and exports of visible items is

called
-------- BOT

3 Economic transactions in BOP are

a) Visible stems b) Invisible items c) Capital transfers d) All of these

4 Transactions which take place on both current and capital account are
a) Autonomous b) Accommodating
c) Both (a) and (b) d) neither (a) and (b)

5 Foreign exchange transactions which are independent of other

transaction in the BOP Account are called
a) Current account transaction b) Capital account transaction
c) Autonomous transactions d) Accommodating transactions

6 Export of machinery is recorded in the

a) credit side of capital account b) debit side of capital account
c) credit side of current account d) debit side of current account

7 Loans Taken from the word Bank are recorded in the

a) Credit side of the capital account b) Debit side of the capital account
c) Credit side of the current account d) Debit side of one current account

8 In which of the following categories are the transactions of balance of

trade recorded?
(a) Visible items (b) Invisible items
(c) Capital transfers (d) All of these
9 Invisibles balance refers to:

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 (a) Exports - Imports
(b) Trade balance + Balance of non-factor services
(c) Balance of non-factor services + Balance of transfer
(d) Exports - Imports + Balance of factor services

10 Exports = Rs 1,000 lakh, imports = Rs 1,650 lakh, balance of trade

shows:
(a) surplus of Rs 650 lakh (b) deficit of Rs 650 lakh
(c) balance of Rs 2,650 lakh (d) none of these

11 ASSERTION - REASON:
Assertion (A)- Economic transactions of Indian investing in assets abroad
is recorded under debit side of capital account in BOP.
Reason (R)- BOP is the difference between, inflow of foreign exchange
and outflow of foreign exchange on account of economic transactions.
Alternatives:-
a) Both Assertion (A) and Reason (R) are true and Reason (R) is the
correct explanation of Assertion (A)
b) Both Assertion (A) and Reason (R) are true and Reason (R) is not
the correct explanation of Assertion (A)
c) Assertion (A) is true and Reason (R) is false
d) Assertion (A) is false and Reason (R) is true

12 In a hypothetical economy, the following data is given

SL N Items Amount (in Rs.

Crores)
1 Merchandise Exports 100
2 Merchandise Imports 90
3 Tourism 70
4 Net Remittances from abroad ―20

The value of balance on current Account would be Rs. _______________

crores.
(a) 100 (b) 70 (c) 80 (d) 60

13 Statement -1 : BOP is an accounting statement which records all the

economic
transactions that take place between the residents of a country during a
given period of time.
Statement -2 :Current account of BOP records that transactions that
relate to assets or liabilities.
Alternatives:
(a). Both the statement are true.
(b) Both the statement are false.
(c ). Statement 1 is true, but Statement 2 is false
(d.) Statement 2 is true , but Statement 1 is false

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14 Which of the following items is entered on the credit side of B0P
account?
(A) Investment from abroad (B) Import of goods
(C) Gifts paid to foreigners
(D) Repayment of foreign loan

15 An account indicating a systematic record of all economic transactions

between
residents of a country and residents of foreign countries during a
account yr is called ___________Account.
(A) Balance of Trade (B) Balance of Payment
(C) Government budget (D) None of these

16 Current account of BoP records

(A) Exports and import of goods
(B) Exports and import of services
(C) Unilateral transfers from and to foreigners
(D) All of these

17 Outflow of foreign exchange is recorded on the ___________sides.

(A) credit
(B) debit
(C) either (I) or (ii)
(D) neither (I) nor (ii)

18 Which of the following is a component of capital account of BoP?

(A) Export and import of goods
(B) Export and import of services
(C) Unilateral transfers
(D) Sale of assets to foreigners

19 Which of the following is included in balance of trade?

(A) Shipping
(B) Insurance
(C) Imports of goods
(D) Unilateral transfers

20 The balance of trade shows a deficit of 500 crore. The value of exports is
Rs. 700
crore. Find the value of imports.
(A) Rs. 700 crore
(B) Rs.1200 crore
(C) Rs.900crore
(D) Rs. 200 crore

21 Trade surplus refers to _________________.

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 (a) Export of goods and services > Import of goods and service
(b) Import of goods and service > Export of goods and services
(c) Export of invisible items > Import of invisible items
(d) Export of Visible items > Import of Visible items
22 Exports of COVID- 19 vaccines manufactured in India has led to -----
(a) Inflow of Indian currency
(b) Outflow of foreign currency
(c) Inflow of foreign currency and employment generation
(d) Outflow of foreign currency and employment generation

(a) What do you mean by BOP? What are its two accounts?

(b) What are the characteristics of BOP?

Solution
(a) Balance of payment account is defined as a systematic record of all
the transactions that take place between residents of a country and
residents of other countries over a given time period. Its two
components are:

1. Current account: This relates to all the activities that do not alter the
assets and liabilities of a country. It is the record of all the transactions
for goods, services and unilateral transfers.

Following are the items of the current account :

(i) Balance of trade account or visible items
(ii) Balance of invisible accounts
(iii) Unilateral transfers etc.

2. Capital Account: It records the international transactions which affect

the assets and liabilities of the domestic country.
Following are the items of capital account:
(i) Private transactions
(ii) Official transactions
(iii) Foreign direct investment etc.
(b) Following are the characteristics of BOP:

1. Systematic record: It is a systematic record of payment and receipts

of a country relating to the economic transactions with other countries.

2. Fixed period of time: It is recorded for a fixed period of time, i.e.,

generally one year.

3. Double entry system: Transactions are recorded on the basis of

double entry system according to which it always gets balanced.

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he trade of goods and services is an important factor when it comes to the balance of payments, which
indeed, is very important for every country’s economy. What is the balance of payments and how does
foreign trade affect it? Let’s learn about the balance of payments, its components, and why it is
important for every nation. We have also prepared for you examples and graphs based on UK and US
balance of payments data. Don't wait and read on!

What is the balance of payments?

The balance of payments (BOP) is like a country's financial report card, tracking its international
transactions over time. It shows how much a nation earns, spends, and invests globally through three
main components: current, capital, and financial accounts. You can see them in Figure 1.

Balance of Payments Balance of Payments Components StudySmarter

Fig. 1 - Balance of Payments

Balance of Payments Definition

The balance of payments is a comprehensive and systematic record of a country's economic transactions
with the rest of the world, encompassing goods, services, and capital flows within a specified time
frame. It comprises the current, capital, and financial accounts, each reflecting different types of
transactions.

Imagine a fictional country called "TradeLand" that exports toys and imports electronics. When
TradeLand sells toys to other countries, it earns money, which goes into its current account. When it
buys electronics from other countries, it spends money, which also affects the current account. The
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capital account reflects the sale or purchase of assets like real estate, while the financial account covers
investments and loans. By tracking these transactions, the balance of payments offers a clear picture of
TradeLand's economic health and its relationship with the global economy.

Components of the balance of payments

Balance of payments comprises three components: current account, capital account and financial
account.

Current account

The current account indicates the country’s economic activity. The current account is divided into four
main components, which record the transactions of a country's capital markets, industries, services, and
governments. The four components are:

Balance of trade in goods. Tangible items are recorded here.

Balance of trade in services. Intangible items like tourism are recorded here.

Net income flows (primary income flows). Wages and investment income are examples of what would
be included in this section.

Net current account transfers (secondary income flows). Government transfers to the United Nations
(UN) or European Union (EU) would be recorded here.

The current account balance is calculated using this formula:

Current Account = Balance in trade + Balance in services + Net income flows + Net current transfers

The current account can either be in a surplus or deficit.

Capital account

The capital account refers to the transfer of funds associated with buying fixed assets, such as land. It
also records transfers of immigrants and emigrants taking money abroad or bringing money into a
country. The money the government transfers, such as debt forgiveness, is also included here.

Debt forgiveness refers to when a country cancels or reduces the amount of debt it has to pay.

Financial account

The financial account shows the monetary movements into and out of the country.

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The financial account is split into three main parts:

Direct investment. This records the net investments from abroad.

Portfolio investment. This records financial flows such as the purchasing of bonds.

Other investments. This records other financial investments such as loans.

The balancing item in the balance of payments

As its name states, the balance of payments should balance: the flows into the country should equal the
flows out of the country.

If the BOP records a surplus or a deficit, it is called a balancing item, as there are transactions that were
failed to be recorded by statisticians.

The balance of payments and goods and services

What is the relationship between the balance of payments and goods and services? The BOP records all
the trades of goods and services conducted both by the public and private sectors, to determine the
amount of money flowing into and out of the country.

The trade of goods and services determines whether the country has a deficit or surplus balance of
payments. If the country is able to export more goods and services than it imports, this means that the
country is experiencing a surplus. On the contrary, a country that must import more than it exports is
experiencing a deficit.

Trade of goods and services is, therefore, an important part of the balance of payments. When a country
exports goods and services, it gets credited to the balance of payments, and when it imports, it gets
debited from the balance of payments.

UK balance of payments graph

Explore the UK balance of payment graphs to understand the nation's economic performance over time.
This section features two insightful graphs, with the first illustrating the UK's current account from Q1
2017 to Q3 2021, and the second providing a detailed breakdown of the current account components

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within the same period. Designed for students, these visual representations offer an engaging way to
analyze the UK's international transactions and economic trends.

1. The current account of the UK from the first quarter of 2017 to the third quarter of 2021:

Balance of Payments Uk current account as a percentage of GDP StudySmarter

Fig. 2 - UK’s current account as a percentage of GDP. Created with data from the UK Office for National
Statistics, [Link]

Figure 2 above represents the UK’s current account balance as a gross domestic product (GDP)
percentage.

As the graph illustrates, the UK’s current account always records a deficit, except the fourth quarter in
2019. The UK has had a persistent current account deficit for the past 15 years. As we can see, the UK
always runs a current account deficit, mainly because the country is a net importer. Thus, if the UK’s
BOP is to balance, its financial account must run a surplus. The UK is able to attract foreign investment,
which allows the financial account to be in a surplus. Therefore, the two accounts balance out: the
surplus cancels the deficit.

2. The breakdown of the UK's current account from the first quarter of 2017 to the third quarter of
2021:

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Balance of Payments UK current account breakdown as percentage of GDP StudySmarter

Fig. 3 - UK’s current account breakdown as a percentage of GDP. Created with data from the UK Office
for National Statistics, [Link]

As mentioned earlier in the article, the current account has four main components. In Figure 3 we can
see the breakdown of each component. This graph illustrates the loss of competitiveness of UK goods
and services, as they always have a negative value, except from 2019 Q3 to 2020 Q3. Since the de-
industrialisation period, UK goods have become less competitive. Lower wages in other countries also
fuelled the decline in the competitiveness of UK goods. Because of that, fewer UK goods are demanded.
The UK has become a net importer, and this causes the current account to be in a deficit.

How to calculate the balance of payments?

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This is the balance of payments formula:

Balance of Payments = Net Current Account + Net Financial Account + Net Capital Account + Balancing
Item

Net means the value after accounting for all expenses and costs.

Let's take a look at an example calculation.

Balance of Payments Calculating the balance of payments StudySmarter

Fig. 4 - Calculating the Balance of Payments

Net current account: £350,000 + (-£400,000) + £175,000 + (-£230,000) = -£105,000

Net capital account: £45,000

Net financial account: £75,000 + (-£55,000) + £25,000 = £45,000

Balancing item: £15,000

Balance of Payments = Net Current Account + Net Financial Account + Net Capital Account + Balancing
Item

Balance of payments: (-£105,000) + £45,000 + £45,000 + £15,000 = 0

In this example, the BOP equals zero. Sometimes it might not equal zero, so don’t be put off by that. Just
ensure that you have double-checked your calculation.

Balance of payments example: a closer look

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Explore the balance of payment with a real-life example that will help you better grasp the concept.

This table presents a concise summary of the main components, including the current, capital, and
financial accounts, to provide a comprehensive understanding of the country's financial position.

mprehensive understanding of the country's financial position.

Table 2. US Balance of Payment 2022

Amount ($ Change from 2021
Component
billion)
Current Account -943.8 Widened by 97.4
Exports ↑ 324.5, Imports ↑
- Trade in goods -1,190.0
425.2
Exports ↑ 130.7, Imports ↑
- Trade in services 245.7
130.3
Receipts ↑ 165.4, Payments
- Primary income 178.0
↑ 127.5
Receipts ↑ 8.8, Payments ↑
- Secondary income -177.5
43.8
Receipts ↑ 5.3, Payments
Capital Account -4.7
↑ 7.4
Financial Account
-677.1
(net)
- Financial assets 919.8 Increased by 919.8
- Liabilities 1,520.0 Increased by 1,520.0
- Financial
-81.0
derivatives
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 Source: BEA, U.S. International Transactions, 4th Quarter and Year 20221

The current account saw a widening deficit, primarily driven by an increase in the trade of goods and
secondary income, indicating that the US imported more goods and paid more income to foreign
residents than it exported and received. Despite the deficit, an increase in the trade of services and
primary income shows some positive signs for the economy, as the country earned more from services
and investments. The current account is a key indicator of a nation's economic health, and a growing
deficit may signal potential risks, such as reliance on foreign borrowing and potential pressure on the
currency.

The capital account experienced a minor decrease, reflecting changes in capital-transfer receipts and
payments, such as infrastructure grants and insurance compensation for natural disasters. Although the
capital account's overall impact on the economy is relatively small, it helps to provide a comprehensive
picture of the country's financial transactions.

The financial account reveals that the US continued borrowing from foreign residents, increasing
financial assets and liabilities. An increase in financial assets shows that US residents are investing more
in foreign securities and businesses, while the growth in liabilities indicates that the US relies more on
foreign investments and loans. This reliance on foreign borrowing can affect the economy, such as
increased vulnerability to global market fluctuations and potential impacts on interest rates.

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In summary, the US Balance of Payments for 2022 highlights the country's widening current account
deficit, a minor decrease in the capital account, and continued reliance on foreign borrowing through
the financial account

Balance of Payments - Key takeaways

The balance of payments summarises all the financial transactions made between the residents of a
country and the rest of the world over a certain period.

The balance of payments has three components: the current account, the capital account, and the
financial account.
The current account provides an indication of the country's economic activity.
The trade of goods and services determines whether the country has a deficit or surplus balance of
payments.

Balance of Payments = Current Account + Financial Account + Capital Account + Balancing Item.

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