Balance of Payments (BOP)—is an accounting record of a
country’s trade in goods, services, and financial assets with
the rest of the world during a particular time period (year or
quarter).
The BOP is divided into three main categories:
•The current account,
•The capital account and,
•The financial account.
Balance of Payments
Current Account
•The current account includes the value of trade in
merchandise, services, income from investments,
and unilateral transfers.
•Merchandise—tangible goods.
•Services—include travel and tourism, royalties, transport
costs, and insurance.
•Income from investments—interest and dividends.
•Unilateral transfers—include foreign aid, gifts, and
retirement pensions.
Capital Account
Financial Account
The financial transactions include:
Direct Investment
Purchases of Equity and Debt Securities
Bank Claims and Liabilities
Government Assets Abroad
Foreign Official Assets in the country in
consideration
The capital account is where all international capital transfers
are recorded. This refers to the acquisition or disposal of non-
financial assets and non-produced assets, which are needed for
production but have not been produced, like a mine used for the
extraction of diamonds.
Balance of Trade
•The trade balance is identical to the difference between a country’s
output and its domestic demand.
•The balance of trade forms part of the current account. If the current
account is in surplus, the country’s net international asset position
increases correspondingly and vice-versa.
•Factors that can affect the balance of trade include:
The cost of production (land, labor, capital, taxes, incentives, etc.) in the
exporting economy vis-à-vis those in the importing economy
The cost and availability of raw materials, intermediate goods and other
inputs
Exchange rate movements
The availability of adequate foreign exchange with which to pay for
imports
Difference between Balance of Trade
and the Balance of Payments
Balance of Trade
•The Balance of Trade includes only visible
imports and exports, i.e. imports and exports of
merchandise, the difference of imports and
exports is called Balance of Trade.
•Balance of Trade includes revenues received or
paid on account of imports and exports of
merchandise. It shows only revenue items.
•Balance of Trade can be favourable or
unfavourable. If imports are more than exports, it
is unfavourable balance of trade. If exports
exceeds imports, it is favourable balance of
trade.
•In case of Balance of Trade, there is no deficit or
Balance of Payment
•The Balance of Payments includes all those
visible and invisible items exported from and
imported into the country in addition to exports
and imports of merchandise.
•Balance of Payments includes all revenue and
capital items whether visible or non-visible.
Balance of Trade thus form a part of Balance of
Payments.
•Balance of Payments is always balanced just like
Trading and Profit and Loss A/c of a business.
•In case of Balance of Payments, any balance,
Regression between Import of Oil and GDP at factor cost and market price
Year
Degree of Openness at factor cost
Degree of openness at market price
1986
–87 11.11 10.05
1987
–88 11.42 10.30
1988
–89 12.23 11.09
1989
–90 13.80 12.55
1990
–91 14.24 12.92
1991
–92 14.98 13.64
1992
–93 16.63 15.11
1993
–94 17.46 16.03
1994
–95 18.07 16.51
1995
–96 20.48 18.67
1996
–97 19.80 18.16
1997
–98 19.64 18.08
1998
–99 19.06 17.64
1999
–00 20.17 18.53
2000
–01 21.71 19.95
2001
–02 20.88 19.28
2002
–03 23.57 21.78
2003
–04 24.85 22.96
2004
–05 29.49 27.03
2005
–06 32.94 30.24
2006
–07 35.72 32.88
2007
–08 36.41 33.45
2008
–09 41.77 39.35
2009
–10 36.16 34.11
2010
–11 38.99 36.31
2011
–12 45.42 42.30
2012
–13 45.84 42.55
2013
–14 44.00 40.58
We have seen that the correlation between degree of openness and GDP is also very high of
approximately 0.95.