Balance of Payment : Economics Notes for SSC Exam

General Awareness section is the most scoring section of SSC exams provided we prepare for it well in advance.Economics is a very important part of GK which helps you to get good marks and a good understanding of Indian and world's economy. In this article we will be covering Balance of Payment topic in detail.

 The balance of payments (BOP)

1. It is the method countries use to monitor all international monetary transactions at a specific period. Usually, the BOP is calculated every quarter.
2. All trades conducted by both the private and public sectors are accounted for in the BOP to determine how much money is going in and out of a country.
3. If a country has received money, this is known as a credit, and if a country has paid or given money, the transaction is counted as a debit.
4. Theoretically, the BOP should be zero, meaning that assets and liabilities should balance, but in practice, this is rarely the case.
5. The BOP can tell the observer if a country has a deficit or a surplus and from which part of the economy the discrepancies are stemming.

The BOP is divided into three main categories:-

  1. The current account.
  2. The capital account.
  3. The financial account.

The main constituents of these categories and points are listed below:-

Category Main points to ponder
The Current Account The current account is used to mark the inflow and outflow of goods and services into a country.
Earnings on investments, both public and private, are also put into the current account.
Within the current account are credits and debits on the trade of merchandise, which includes goods such as raw materials and manufactured goods that are bought, sold or given away
Services refer to receipts from tourism, transportation , engineering, business service fees and royalties from patents and copyrights.
When combined, goods and services together make up a country's balance of trade (BOT).
The BOT is typically the biggest bulk of a country's balance of payments as it makes up total imports and exports.
If a country has a balance of trade deficit, it imports more than it exports, and if it has a balance of trade surplus, it exports more than it imports.
Receipts from income-generating assets such as stocks (in the form of dividends) are also recorded in the current account
The last component of the current account is unilateral transfers. These are credits that are mostly worker's remittances, which are salaries sent back into the home country of a national working abroad, as well as foreign aid that is directly received.
The Capital Account The capital account is where all international capital transfers are recorded. 
This refers to the acquisition or disposal of non-financial assets (for example, a physical asset such as land) and non-produced assets, which are needed for production but have not been produced, like a mine used for the extraction of diamonds.
The capital account is broken down into the monetary flows branching from debt forgiveness, the transfer of goods, and financial assets by migrants leaving or entering a country, the transfer of ownership on fixed assets
The transfer of funds received to the sale or acquisition of fixed assets, gift and inheritance taxes, death levies and, finally, uninsured damage to fixed assets.
The Financial Account In the financial account, international monetary flows related to investment in business, real estate, bonds and stocks are documented.
Also included are government-owned assets such as foreign reserves, gold, special drawing rights (SDRs) held with the International Monetary Fund (IMF), private assets held abroad and direct foreign investment.
Assets owned by foreigners, private and official, are also recorded in the financial account.

Fiscal deficit: - A fiscal deficit occurs when a government's total expenditures exceed the revenue that it generates, excluding money from borrowings. Deficit differs from debt, which is an accumulation of yearly deficits. It has its pro’s and con’s, as per some economist it’s a positive sign in helping countries climb out of economic recession. On the other hand, fiscal conservatives feel that governments should avoid deficits in favor of a balanced budget policy.

Fiscal Deficit = ‘Total Expenditure - Total Receipts excluding the borrowings.

The main points of fiscal deficit are listed below:-

Main Points Details
Implications of Fiscal Deficit Debt Trap: Fiscal deficit indicates the total borrowing requirements of the government. Borrowings not only involve repayment of principal amount, but also require Interest payments increase the revenue expenditure, which leads to revenue deficit. It creates a vicious circle of fiscal deficit and revenue deficit, wherein government takes more loans to repay the earlier loans. As a result, country is caught in a debt trap.
Inflation: Government mainly borrows from Reserve Bank of India (RBI) to meet its fiscal deficit. RBI prints new currency to meet the deficit requirements. It increases the money supply in the economy and creates inflationary pressure.
Foreign Dependence: Government also borrows from rest of the world, which raises its dependence on other countries.
Hampers the future growth: Borrowings increase the financial burden for future generations. It adversely affects the future growth and development prospects of the country.
Sources of Financing Fiscal Deficit Borrowings: Fiscal deficit can be met by borrowings from the internal sources (public, commercial banks etc.) or the external sources (foreign governments, international organizations etc.).
Deficit Financing (Printing of new currency): Government may borrow from RBI against its securities to meet the fiscal deficit. RBI issues new currency for this purpose. This process is known as deficit financing. Borrowings are considered a better source as they do not increase the money supply which is regarded as the main cause of inflation. On the other hand, deficit financing may lead to inflationary trends in the economy due to more money supply.

After reading this article, you are advised to attempt quizzes as much as you can. It’s time to pull up your shocks as competition is increasing day by day. But if you prepare well by investing your time in right direction, you can stand out of crowd.

All the best for your Exams,

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