International Finance

BALANCE OF PAYMENTS

BALANCE OF PAYMENTS

What is BoP? Why BoP statistics important for analysts and investors?

Balance of Payments Accounting

The Balance of Payments is record of a country’s international transactions (flows) over a certain period It Includes the transactions of its citizens and government. Traces flow of money not flow of goods/ securities. Money flowing in from foreign country: +ve entry and money flowing out: -ve entry on BoP

BoP and National Income accounting

Y= AD. i.e., Y =C+I+G+(X-M) S=Y-C-T Sub (1) in (2) S= C+I+G+(X-M)-C-T I =S+ (T-G) + (M-X) (I-S)=(T-G) + (M-X) (1) (2)

(3) (4)

Twin deficit problem: (I-S) is const., govt. budget deficit has to be offset by current a/c deficit.

Twin deficit problem

Budget Deficit 300 Billions of Dollars 250 200 150 100 50 0

1992 269 30 U.S TRADE AND BUDGET DEFICITS 1993 223 65 Trade Deficit

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993

Year

7 6 5 4 3 2 1 0 -1 -2 -3

INDIA – FISCAL DEFICIT AND CURRENT A/C DEFICIT

FD CAD

INDIA'S OVERALL BALANCE OF PAYMENTS (US $ million) 2009-10 2010-11 2011-12 2012-2013 Item A.CURRENT ACCOUNT I. MERCHANDISE II.INVISIBLES Total Current Account (I+II) B. CAPITAL ACCOUNT (FINANCIAL A/C) 1. Foreign Investment (a+b) a) Foreign Direct Investment b) Portfolio Investment 2.Loans 3. Banking Capital 4. Other capital Total Capital Account C. Errors & Omissions D. Overall Balance(A+B+C) E. Change in Reserves -118204 80023 -38180 -127322 79269 -48053 -189759 111604 -78155 -195656 107493 -88163 Net Net Net Net

50363 17966 32396 12447 2085 -13259 51634 -13 13442 -13441

42127 11834 30293 29135 4962 -12484 63740 -2636 13050 -13050

39231 22061 17170 19307 16226 -7008 67755 -2432 -12831 12831

46711 19819 26891 31124 16570 -5105 89300 2689 3826 -3826