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CBSE Class 12 Commerce Economics Balance Of Payments Complete Notes

CBSE Class 12 Commerce Economics Balance Of Payments Complete Notes

CBSE Class 12 Commerce Economics Balance Of Payments : CBSE board has been offering a robust, holistic school education to students since its inception. The board first analyzes students’ learning requirements and according to that, it prepares suitable syllabus for each class. Additionally, the board designs appropriate question papers to evaluate students’ subject knowledge at the end of each academic session. Moreover, to keep students stress free during exams, the board also designs sample papers for each class. The CBSE board conducts research to get to know the current educational requirements and based on that, it chooses suitable subjects and their relevant topics. Hence, students, who are pursuing their studies under this board, get updated information and keep them prepared for any competitive exams.

CBSE Class 12 Commerce Economics Balance Of Payments Complete Notes

CBSE Class 12 Commerce Economics Balance Of Payments : Economics focuses on the behavior and interactions of economic agents and how economies work. Consistent with this focus, textbooks often distinguish between microeconomics and macroeconomics. Microeconomics examines the behavior of basic elements in the economy, including individual agents and markets, their interactions, and the outcomes of interactions. Individual agents may include, for example, households, firms, buyers, and sellers. Macroeconomics analyzes the entire economy (meaning aggregated production, consumption, savings, and investment) and issues affecting it, including unemployment of resources (labor, capital, and land), inflation, economic growth, and the public policies that address these issues (monetary, fiscal, and other policies).

Other broad distinctions within economics include those between positive economics, describing “what is”, and normative economics, advocating “what ought to be”; between economic theory and applied economics; between rational and behavioral economics; and between mainstream economics and heterodox economics.

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CBSE Class 12 Commerce Economics Balance Of Payments Complete Notes

CBSE Class 12 Commerce Economics Balance Of Payments : The balance of payments, also known as balance of international payments and abbreviated B.O.P., of a country is the record of all economic transactions between the residents of the country and the rest of the world in a particular period (over a quarter of a year or more commonly over a year). These transactions are made by individuals, firms and government bodies. Thus the balance of payments includes all external visible and non-visible transactions of a country. It is an important issue to be studied, especially in international financial management field, for a few reasons. First, the balance of payments provides detailed information concerning the demand and supply of a country’s currency. For example, if Mauritius imports more than it exports, then this means that the supply of rupees is likely to exceed the demand in the foreign exchanging market, ceteris paribus. One can thus infer that the Mauritius rupee would be under pressure to depreciate against other currencies. On the other hand, if Mauritius exports more than it imports, then the rupee would be likely to appreciate. Second, a country’s balance-of-payment data may signal its potential as a business partner for the rest of the world.

If a country is grappling with a major balance-of-payment difficulty, it may not be able to expand imports from the outside world. Instead, the country may be tempted to impose measures to restrict imports and discourage capital outflows in order to improve the balance-of-payment situation. On the other hand, a country experiencing a significant balance-of payment surplus would be more likely to expand imports, offering marketing opportunities for foreign enterprises, and less likely to impose foreign exchange restrictions. Third, balance-of-payments data can be used to evaluate the performance of the country in international economic competition. Suppose a country is experiencing trade deficits year after year. This trade data may then signal that the country’s domestic industries lack international competitiveness. To interpret balance-of-payments data properly, it is necessary to understand how the balance of payments account is constructed.[1][2] These transactions include payments for the country’s exports and imports of goods, services, financial capital, and financial transfers. It is prepared in a single currency, typically the domestic currency for the country concerned. Sources of funds for a nation, such as exports or the receipts of loans and investments, are recorded as positive or surplus items. Uses of funds, such as for imports or to invest in foreign countries, are recorded as negative or deficit items.

CBSE Class 12 Commerce Economics Balance Of Payments Complete Notes

CBSE Class 12 Commerce Economics Balance Of Payments : A statement that summarizes an economy’s transactions with the rest of the world for a specified time period. The balance of payments, also known as balance of international payments, encompasses all transactions between a country’s residents and its nonresidents involving goods, services and income; financial claims on and liabilities to the rest of the world; and transfers such as gifts. The balance of payments classifies these transactions in two accounts – the current account and the capital account. The current account includes transactions in goods, services, investment income and current transfers, while the capital account mainly includes transactions in financial instruments. An economy’s balance of payments transactions and international investment position (IIP) together constitute its set of international accounts.

BREAKING DOWN ‘Balance Of Payments (BOP)’

Despite its name, the “balance of payments” data is not concerned with actual payments made and received by an economy, but rather with transactions. Since many international transactions included in the balance of payments do not involve the payment of money, this figure may differ significantly from net payments made to foreign entities over a period of time.

Does the “balance of payments” actually balance? In theory, a current account deficit would have to be financed by a net inflow in the capital and financial account, while a current account surplus should correspond to an outflow in the capital and financial account for a net figure of zero. In actual practice, however, the fact that data are compiled from multiple sources gives rise to some degree of measurement error.

Balance of payments and international investment position data are critical in formulating national and international economic policy. Certain aspects of the balance of payments data, such as payment imbalances and foreign direct investment, are key issues that a nation’s economic policies seek to address.

Economic policies are often targeted at specific objectives that, in turn, impact the balance of payments. For example, a country may adopt policies specifically designed to attract foreign investment in a particular sector. Another nation may attempt to keep its currency at an artificially depressed level to stimulate exports and build up its currency reserves. The impact of these policies is ultimately captured in the balance of payments data.

CBSE Class 12 Commerce Economics Balance Of Payments Complete Notes

CBSE Class 12 Commerce Economics Balance Of Payments : The balance of payments of a country is a systematic account in the form of summarized record of all the economic transactions between residents of a country and non-residents over a given period (normally the BOP covers a period of one year) the account is prepared using the double entry accounting systems with both the debit and credit aspects of each transactions being recorded under different heads within the account which implies that the BOP account always balances (that is basically debit and credit summations are equal).

What are the components of the BOP account?

  1. Current account: The current account pf the BOP id made up of three balances namely merchandise visible and tangible products and unilateral transfer balance . effectively it reflects the net flow of goods , services and unilateral transfers (gifts donations legacies etc.)
  2. Capital account: The capital account records all the international transactions that involve creation of assets and liabilities in foreign currencies . these transactions involve “ a reverse flow” for E.G. a loan taken in foreign currency creates a ready inflow with a corresponding future liability / payable.

Surplus or deficit in the balance of payment account:

  • Accommodating or autonomous capital flows concept – an autonomous transaction is undertaken in the normal course of business in response to the given environment of price levels , exchange rates , interest rates etc. it does not take into account the equilibrium aspect of the BOP . An accommodating transaction is a transaction undertaken with the specific intention of adjusting the imbalance arising out of other transactions . all the foreign currency flows can then thus be classified as “ autonomous or accommodating” .
  • Obviously the net effect of the accommodating and autonomous items must be zero since all the entries in the BOP account must get reflected under one of the two headings the always balances whether the bop is in surplus or deficit depends on the balance of the autonomous items .
  • The bop is said to be in surplus if the number of the autonomous receipts are greater in the number than the autonomous payments and if the deficit is there then the payments will be greater in number then the receipts
  • Autonomous transactions are are viewed as the above the line transactions and the accommodating transactions are considered to be the Below the line transaction.

Effectively all the elements in the currency flows captured in the balance of payments recorded in either the current of capital accounts which together constitute the autonomous transactions . the monetary authorities trough the use of the Reserve account makes the necessary adjustments for balancing the above transactions and these transactions hence represent the accommodating transactions.

Balance Of Payments (BOP Economics): Deficit, Account, Crisis and Formula infographic

How does an imbalanced BOP is adjusted ? what are the measures utilized by the government in order to reply the balance of payments?

If the domestic expenditure of the economy is more than the domestic output , then it results in balance of payment deficit . the difference represents excess of imports over exports . there fore the monetary authority takes a measures to reduce the domestic expenditure to eliminate BOP deficit . the effort to reduce the budget and get fiscal deficit by the government represents its attempt to reduce expenditure . the different policies adopted for reducing / eliminating BOP deficit are:

1) Monetary policies – the usual monetary policies adopted by the government in such a situation are
a) Increase in the interest rates.
b) Increase cash reserve ratio or statutory liquidity ratio.
c) Issue government treasury bills , bonds and securities by way of open market operations.
d) Increase margin requirements .
The ultimate effect of these policies in that the money with the public reduces and the market velocity reduces . when the money with the public reduces and the market velocity reduces when the public reduces , the consumption expenditure also declines thus reducing the BOP deficit.

2) Fiscal policies – fiscal policies relate to the government budget . the income slide of the budget comprises the direct and the indirect taxes collected by the government increase on direct taxes that is income tax etc reduces the disposable income of the population which reduces both consumption and savings.and increase in indirect taxes like custom duty , excise duty etc increases the cost of acquiring goods and services reducing consumption . historically changes in fiscal policies have been more effective in reducing expenditure or the defect of the country.

3) Trade policies – if the major cause of the BOP defect is the adverse balance of trade . then trade policy changes are very effective and in such situations the government tends to promote exports and imports substitution and incentives to exporters such as concessional credit , reduced margins on borrowings , income tax benefit reliefs in excise duties , customs duties and concessions in other inputs such as transportation , land , electricity power and raw materials.

4) Devaluation / depreciation of exchange rate – economies which operate on either a fixed exchange rate system or a managed float system use the exchange rate to achieve equilibrium in international trade . devaluation is a conscious step taken by the monitory authority to reduce the exchange rate led reductions in the currency value . both results in increasing the cost f imports of the products and make the exports of the products more profitable . the higher cost of foreign currencies reduces imports and boosts exports thereby reducing the trade defecit and achieving equilibrium.

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