<<–2/”>a >a href=”https://exam.pscnotes.com/balance-of-payments/”>Balance of Payments is a systematic record of all economic transactions undertaken by residents of one country i.e. households, firms and the government with their counterparts in rest of the world. It consists of:
1. Current Account,
2. Capital Account and
3. Reserve Account.
The Current Account covers transactions in goods and Services and transfers during the current period. Current Account = Value of Exports- Value of Imports + Net Transfers from Abroad = Net Exports + Net Transfers from Abroad
The current account records exports and imports in goods and services and Transfer Payments. When exports exceed imports, there is a trade surplus and when imports exceed exports there is a Trade Deficit.
Directorate General of Foreign Trade (DGFT) organisation is an attached office of the Ministry of Commerce and Industry and is headed by Director General of Foreign Trade. Right from its inception till 1991, when Liberalization-2/”>Liberalization in the economic policies of the Government took place, this organization has been essentially involved in the regulation and promotion of foreign trade through regulation. Keeping in line with liberalization and Globalization/”>Globalization-3/”>Globalization and the overall objective of increasing of exports, DGFT has since been assigned the role of “facilitator”. The shift was from Prohibition and control of imports/exports to promotion and facilitation of exports/imports, keeping in view the interests of the country.
Foreign Trade Policy of India has always focused on substantially increasing the country’s share of global merchandise trade. Accordingly the Government of India has been taking various steps towards boosting its trade with the rest of the world by adopting policies and procedures which would help to increase and facilitate both exports and imports with the other countries of the world.
India’s exports declined by 1.3 per cent and 15.5 per cent in 2014-15 and 2015-16 respectively. The trend of negative Growth was reversed somewhat during 2016-17 (April-December), with exports registering a growth of 0.7 per cent to US$ 198.8 billion from US$ 197.3 billion in 2015-16 (April-December). During 2016-17 (AprilDecember) Petroleum, oil and lubricants (POL) exports constituting 11.1 per cent of total exports.
India’s exports to Europe, Africa, America, Asia and CIS and Baltics declined in 2015-16. However, India’s exports to Europe, America and Asia increased by 2.6 per cent, 2.4 per cent and 1.1 per cent respectively in 2016-17 , while exports to Africa declined by 13.5 per cent. USA followed by UAE and Hong Kong were the top export destinations.
Value of imports declined from US$ 448 billion in 2014-15 to US$ 381 billion in 2015-16, mainly on account of decline in crude oil prices.Top three import destinations of India were China followed by UAE and USA in 2016-17.
India’s trade deficit declined by 13.8 per cent (vis-à-vis 2014- 15) to US$ 118.7 billion. Furthermore, it declined by 23.5 per cent to US$ 76.5 billion in 2016-17 (April-December) as compared to US$ 100.1 billion in the corresponding period of previous year.
The exchange rate policy is guided by the broad principle of careful monitoring and management of exchange rates with flexibility, while allowing the underlying demand and supply conditions to determine exchange rate movements over a period in an orderly manner. Subject to this predominant objective, RBI intervention in the Foreign Exchange market is guided by the objectives of reducing excess volatility, preventing the emergence of destabilizing speculative activities, maintaining adequate level of reserves, and developing an orderly Foreign exchange market.
In modern Monetary Policy, a Devaluation is an official lowering of the value of a country’s currency within a Fixed Exchange Rate system, by which the monetary authority formally sets a new fixed rate with respect to a foreign reference currency or currency basket. In contrast, a depreciation is a decrease in a currency’s value (relative to other major currency benchmarks) due to market forces under a Floating Exchange rate, not government or central bank policy actions.
India has been experiencing trade deficit for more than a couple of decades. The value of Indian rupee has been fluctuating and devaluation could not bring sufficient impact to the export sector. This is because the Indian economy is heavily dependent upon imported energy and industrial goods.
Foreign exchange
Foreign exchange is the exchange of one currency for another or the conversion of one currency into another currency. Foreign exchange also refers to the global market where currencies are traded virtually around the clock.
Foreign exchange transactions encompass everything from the conversion of currencies by a traveler at an airport kiosk to billion-dollar payments made by corporations, financial institutions and governments. Transactions range from imports and exports to speculative positions with no underlying goods or services. Increasing globalization has led to a massive increase in the number of foreign exchange transactions in recent decades.
The global foreign exchange market is the largest and the most liquid financial market in the world, with Average daily volumes in the trillions of dollars. Foreign exchange transactions can be done for spot or forward delivery. There is no centralized market for forex transactions, which are executed over the counter and around the clock.
The foreign exchange market is unique for several reasons, mainly because of its size. Trading volume in the forex market is generally very huge. As an example, trading in foreign exchange markets averaged $5.1 trillion per day in April 2016, according to the Bank for International Settlements, which is owned by 60 central banks, and is used to work in monetary and financial responsibility .
Trading in the Foreign Exchange Market
The market is open 24 hours a day, five days a week across major financial centers across the globe. This means that you can buy or sell currencies at any time during the day. 
The foreign exchange market isn’t exactly a one-stop shop. There are a whole variety of different avenues that an investor can go through in order to execute forex trades. You can go through different dealers or through different financial centers which use a host of electronic networks.
From a historic standpoint, foreign exchange was once a concept for governments, large companies and Hedge Funds. But in today’s world, trading currencies is as easy as a click of a mouse — accessibility is not an issue, which means anyone can do it. In fact, many Investment firms offer the chance for individuals to open accounts and to trade currencies however and whenever they choose.
Foreign exchange of india
The Foreign exchange reserves of India are India’s holdings of cash, bank deposits, Bonds, and other financial assets denominated in currencies other than India’s national currency, the Indian rupee. The reserves are managed by the Reserve Bank of India for the Indian government and the main component is foreign currency assets. Foreign exchange reserves act as the first line of defense for India in case of economic slowdown, but acquisition of reserves has its own costs Foreign exchange reserves facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India. India’s total foreign exchange (Forex) reserves stand at US$426.0824 billion with foreign exchange assets (FCA) component at US$400.9782 billion, gold reserves at US$21.4842 billion, SDRs (Special Drawing Rights with the IMF) of US$1.5406 billion and US$2.0794 billion reserve position in IMF in the week to April 13, 2018, as per Reserve Bank of India’s (RBI) weekly statistical supplement published on April 20, 2018. The Economic survey of India 2014-15 said India could target foreign exchange reserves of US$750 billion-US$1 trillion.
As of September 2017, India’s foreign exchange reserves are mainly composed of US dollar in the forms of US Government Bonds and institutional bonds. with nearly 5% of forex reserves in gold. India is, coincidentally the world’s largest gold consuming nation. The FCAs also include investments in US Treasury bonds, bonds of other selected governments and deposits with foreign central and Commercial Banks. India is at 8th position in List of countries by foreign-exchange reserves , just below Republic of China (Taiwan) and Russia.
Reserve Bank of India Act and the Foreign Exchange Management Act, 1999 set the legal provisions for governing the foreign exchange reserves. Reserve Bank of India accumulates foreign currency reserves by purchasing from authorized dealers in open market operations. Foreign exchange reserves of India act as a cushion against rupee volatility once global interest rates start rising. The Foreign exchange reserves of India consists of below four categories; Foreign Currency Assets Gold Special Drawing Rights (SDRs) Reserve Tranche Position.,
The balance of payments is a statement of all economic transactions between a country and the rest of the world during a specific period of time, usually a year. It is divided into two main accounts: the current account and the capital account.
The current account records all payments and receipts for goods, services, income, and current transfers. Goods are tangible items that are bought and sold, such as cars, computers, and oil. Services are intangible items that are provided for a fee, such as tourism, Banking, and insurance. Income is Money that is earned from investments, such as dividends and interest. Current transfers are payments that are not made in exchange for goods or services, such as foreign aid and Remittances.
The capital account records all payments and receipts for capital assets, such as land, buildings, and machinery. It also includes financial transactions, such as loans and investments.
The balance of payments is always in balance, but the two accounts can be in surplus or deficit. A surplus in the current account means that the country is earning more from its exports than it is spending on its imports. A deficit in the current account means that the country is spending more on its imports than it is earning from its exports.
The capital account can also be in surplus or deficit. A surplus in the capital account means that the country is receiving more money from foreign investors than it is sending out to foreign investors. A deficit in the capital account means that the country is sending out more money to foreign investors than it is receiving from foreign investors.
The balance of payments is important because it provides information about a country’s economic Health. A country with a large Current Account Deficit is likely to be experiencing economic problems, such as high Unemployment and Inflation. A country with a large capital account surplus is likely to be experiencing economic growth.
The foreign exchange market is a global marketplace where currencies are bought and sold. It is the largest financial market in the world, with an estimated daily turnover of over $5 trillion.
The exchange rate is the price of one currency in terms of another. It is determined by supply and demand. When there is more demand for a currency than there is supply, the exchange rate will rise. When there is more supply of a currency than there is demand, the exchange rate will fall.
The exchange rate regime is the system that a country uses to manage its exchange rate. There are three main exchange rate regimes: floating, fixed, and managed floating.
In a floating exchange rate regime, the value of the currency is determined by supply and demand. The government does not intervene in the market.
In a fixed exchange rate regime, the government sets the value of the currency and then intervenes in the market to keep the exchange rate at that level.
In a Managed floating exchange rate regime, the government allows the value of the currency to fluctuate within a certain range. The government intervenes in the market to keep the exchange rate within that range.
Foreign exchange intervention is when a government buys or sells its own currency in order to influence the exchange rate.
Foreign exchange reserves are the stocks of foreign currencies that a country holds. They are used to finance international trade and to intervene in the foreign exchange market.
Currency depreciation is when the value of a currency falls in relation to other currencies.
Currency appreciation is when the value of a currency rises in relation to other currencies.
Currency devaluation is when a government deliberately lowers the value of its currency.
Currency Revaluation is when a government deliberately raises the value of its currency.
Exchange rate volatility is the degree to which the exchange rate fluctuates over time.
Exchange rate risk is the risk that the value of a currency will change in a way that will harm a company or individual.
Foreign exchange hedging is a way to reduce exchange rate risk. It involves taking a position in a currency that is opposite to the position in the currency that you are hedging.
Foreign exchange speculation is the buying or selling of currencies in the hope of making a profit from changes in the exchange rate.
Foreign exchange arbitrage is the buying and selling of currencies in different markets in order to profit from small differences in the exchange rate.
Foreign exchange forward market is a market where currencies are bought and sold for future delivery.
Foreign exchange futures market is a market where currencies are bought and sold for delivery at a specified future date.
Foreign exchange Options market is a market where currencies are bought and sold with the option to buy or sell them at a specified future date.
Foreign exchange swaps market is a market where currencies are exchanged for a specified period of time and then exchanged back at the end of that period.
What is the balance of payments?
The balance of payments is a statement of all the economic transactions between a country and the rest of the world over a period of time, usually a year. It records all the payments that a country makes to other countries, such as for imports, and all the payments that other countries make to it, such as for exports.
What are the components of the balance of payments?
The balance of payments is divided into three main accounts: the current account, the capital account, and the financial account.
The current account records all the payments that are made for goods and services, as well as income payments and transfers.
The capital account records all the payments that are made for Capital Goods, such as machinery and equipment, as well as financial assets, such as stocks and bonds.
The financial account records all the payments that are made for financial assets, such as stocks and bonds, as well as liabilities, such as loans.
What is the Balance of Trade?
The balance of trade is the difference between the value of a country’s exports and the value of its imports. If a country exports more than it imports, it has a trade surplus. If a country imports more than it exports, it has a trade deficit.
What is the current account balance?
The current account balance is the difference between the value of a country’s exports of goods and services, and the value of its imports of goods and services, as well as income payments and transfers. If a country’s current account balance is positive, it means that it is earning more from its exports and income payments than it is spending on its imports and transfers. If a country’s current account balance is negative, it means that it is spending more on its imports and transfers than it is earning from its exports and income payments.
What is the capital account balance?
The capital account balance is the difference between the value of a country’s capital outflows and its capital inflows. Capital outflows are the investments that a country makes in other countries, while capital inflows are the investments that other countries make in the country. If a country’s capital account balance is positive, it means that it is investing more in other countries than other countries are investing in it. If a country’s capital account balance is negative, it means that other countries are investing more in the country than it is investing in other countries.
What is the financial account balance?
The financial account balance is the difference between the value of a country’s financial outflows and its financial inflows. Financial outflows are the purchases that a country makes of financial assets from other countries, while financial inflows are the purchases that other countries make of financial assets from the country. If a country’s financial account balance is positive, it means that it is buying more financial assets from other countries than other countries are buying from it. If a country’s financial account balance is negative, it means that other countries are buying more financial assets from the country than it is buying from other countries.
What is the exchange rate?
The exchange rate is the price of one currency in terms of another. It is the number of units of one currency that can be exchanged for one unit of another currency.
What are the different types of exchange rates?
There are two main types of exchange rates: fixed exchange rates and floating exchange rates.
A fixed exchange rate is an exchange rate that is set by the government and is not allowed to fluctuate.
A floating exchange rate is an exchange rate that is determined by the market and is allowed to fluctuate freely.
What are the factors that affect the exchange rate?
The exchange rate is affected by a number of factors, including:
- The supply and demand for the currencies involved
- The interest rates in the countries involved
- The inflation rates in the countries involved
- The political and economic stability of the countries involved
What is the impact of a change in the exchange rate?
A change in the exchange rate can have a number of impacts on a country’s economy, including:
- It can affect the country’s exports and imports.
- It can affect the country’s tourism industry.
- It can affect the country’s foreign investment.
- It can affect the country’s inflation rate.
- It can affect the country’s unemployment rate.
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Which of the following is not a component of the balance of payments?
(A) Current account
(B) Capital account
(C) Financial account
(D) Official reserve account -
The current account measures:
(A) A country’s trade in goods and services
(B) A country’s investment income and current transfers
(C) A country’s financial account and capital account
(D) A country’s official reserve account -
The capital account measures:
(A) A country’s trade in goods and services
(B) A country’s investment income and current transfers
(C) A country’s financial account and official reserve account
(D) A country’s long-term and short-term capital flows -
The financial account measures:
(A) A country’s trade in goods and services
(B) A country’s investment income and current transfers
(C) A country’s long-term and short-term capital flows
(D) A country’s official reserve account -
The official reserve account measures:
(A) A country’s trade in goods and services
(B) A country’s investment income and current transfers
(C) A country’s long-term and short-term capital flows
(D) A country’s central bank’s holdings of foreign exchange and gold -
A country’s balance of payments is in surplus when:
(A) The value of its exports is greater than the value of its imports
(B) The value of its imports is greater than the value of its exports
(C) The value of its capital inflows is greater than the value of its capital outflows
(D) The value of its capital outflows is greater than the value of its capital inflows -
A country’s balance of payments is in deficit when:
(A) The value of its exports is greater than the value of its imports
(B) The value of its imports is greater than the value of its exports
(C) The value of its capital inflows is greater than the value of its capital outflows
(D) The value of its capital outflows is greater than the value of its capital inflows -
A country’s balance of payments is in equilibrium when:
(A) The value of its exports is equal to the value of its imports
(B) The value of its imports is equal to the value of its exports
(C) The value of its capital inflows is equal to the value of its capital outflows
(D) The value of its capital outflows is equal to the value of its capital inflows -
A country’s balance of payments can be affected by:
(A) Changes in the exchange rate
(B) Changes in the level of economic activity
(C) Changes in government policy
(D) All of the above -
A country’s balance of payments is important because it:
(A) Measures a country’s international economic position
(B) Can affect a country’s exchange rate
(C) Can affect a country’s economic growth
(D) All of the above