Balance Of Payments

Business, Government and International Economy

The business environment of a firm is the totality of external circumstances which the business faces and over which it has little or no control. The business environment of a firm includes

1. Market forces with their associated uncertainty

2. Forces of demand and supply originating from the rest of the world

3. The government policies

4. Nature i.e. the environmental factors

Now, the scenario is changing. Indian market is getting connected to global market:

1. Appreciation of rupee

2. Change in policies. The country turned into an open economy

3. Change in technology

4. India has missed industrial revolution by indulging into services industry.

5. Stock market boom

Above are some of the changes taken place in the past few years in the Indian economy which is making it more close to the international economy.

With the economy opening up globally, trade has been the centre stage of all human development. The dollar, the most vibrant currency of the world has been the common medium of exchange in international trade. Therefore, building up of foreign exchange is imperative for progress of any economy. Indian's position of foreign exchange reserves was seriously jeopardized in the early 90s when it had just $1 billion of foreign exchange. The subsequent liberalization and revaluation of Indian currency has seen a gradual increase in the foreign exchange reserve of the country. Again, it had to be hard to keep up the foreign exchange reserves of the country during the Asian crisis.

Therefore as a manager we see that the position of the foreign exchange depends on how strong the country's international trade is. There are more of exports as compared to imports in addition to other inflows like investment by foreigners of the country. We also came to know that the government has to incur the cost for holding such reserves.

Balance of Payments

Balance of Payment is a systematic record of all transactions between residents of one country and the rest of the world. It is used to summarize all international economic transactions for that country during a specific time period, usually a year. This is just another economic indicator of a country's relative value and, along with all other indicators, should be used with caution. The BOP includes the trade balance, foreign investments and investments by foreigners.

It is composed of two sections:

1. Capital Account

2. Current Account

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 (assets such as equipment used in the production process to generate income), 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

Current Account

The current account is the sum of net sales from trade in goods and services, net factor income (such as interest payments from abroad), and net unilateral transfers from abroad. Positive net sales from abroad correspond to a current account surplus; negative net sales from abroad correspond to a current account deficit. Because exports generate positive net sales, and because the trade balance is typically the largest component of the current account, a current account surplus is usually associated with positive net exports

The Balance of Payments is the sum of the Current Account and the Capital Account. In economic terms, a balance of payments surplus means a nation has more funds from trade and investments coming in than it pays out to other countries, resulting in an Appreciation in the value of its national currency versus currencies of other nations. A deficit in the balance of payments has the opposite effect: an excess of imports over exports, a dependence on foreign investors, and