Question

ii. Balance of payments account is a summary statement of a nation’s financial transactions with the outside world. Explicate each account as well as each individual components of those accounts? Pakistan is running a BOP deficit express in words what are the main factors contributing towards a BOP deficit and how do you think that we can eradicate such a problem.

Answer 1

According to W L Smith,

"The Balance of Payment is a summary of all the international transactions of a country and its residents during a specified period of time"

According to T Harvey and M Johnson,

"The Balance of Payment accounts for a country set out, in summary form, all the current and capital transactions which have taken place between the resident of the country and the rest of the world in a specified period of time"

Structure of Balance of Payment account

The balance of payment account of a nation follows the procedure known as Double entry book keeping.

The United States Balance of Payment consists of three accounts, the current account, the capital account, and the account of financing of deficit or surplus. It is the standard form of Balance of Payment Account.

i. The Current Account - This section of Balance of Payment records all current transactions which involve either the export or export of goods and services. The goods exported as termed as visible exports.

Items included in Current Account

1. Merchandise trade balance.

2. Exports.

3. Imports.

4. Investment income.

5. Other services.

6. Balance of goods and services. (1+4+5)

7. Unilateral transfers - private and government.

8. Balance on current account. (6+7)

ii. The Capital Account - The Capital Account is counter part of transactions involving currently produced goods and services, which constitute a part of the current account. The nature of capital account can be discerned more clearly, if we ignore for a moment the role of monetary gold in the settlement of international balance.

Items included in Capital Account

9. U S Direct investment abroad.

10. Foreign Direct Investment in United States.

11. United State's Net purchase of foreign securities.

12. Foreign net purchase of United States securities.

13. Bank reported aims on Foreign and others.

14. Balance on capital account. (9+10+11+12+13)

15. Statistical discrepancy.

16. Total to be offset (8+14+15)

iii. The Account of Financing of surplus or deficit - The deficit on current account, apart from the short or long term capital movements, may be adjusted through the transaction involving the sale of gold. Since Gold is universally accepted by the nation in the settlement of balances, the gold selling of exporting countries can obtain necessary amount of foreign exchange for discharge their foreign liabilities.

Balancing items

17. Foreign officials assets in U S.

18. U S Official reserve assets.

19. U S Government assets other than official reserve assets.

Causes of BOP Deficit

1. Developmental activities.

2. Inflation.

3. Political instability .

4. Import of services.

5. Cyclical flectuations.

6. High demand for import.

Measures for B O P Deficit

1. Exchange rate depreciation.

2. Devaluation.

3. Fixation of Quotas.

4. Increase tariff.

5. Import substitution.

6. Export promotion.

7. Exchange control.