BBA F&A Year) (3 rd

International Financial Management

COC642B – SEMESTER 6

International Financial Management COC642B – BBA F&A Jan to May 2023

Unit 2

➢ BOP / BOT

➢ Types of agreements

➢ FDI / FII

International Financial Management COC642B – BBA F&A Jan to May 2023

Unit 2

➢ Visible items which include all types of physical goods exported and
imported.

➢ Invisible items which include all those services whose export and
import are not visible. e.g. transport services, medical services etc.

➢ Capital transfers which are concerned with capital receipts and

capital payment.

International Financial Management COC642B – BBA F&A Jan to May 2023

Balance of payment
The balance of payments of a country is a systematic
record of all economic transactions between the
residents of a country and the rest of the world. It
presents a classified record of all receipts on account of
goods exported, services rendered and capital received
by residents and payments made by them on account
of goods imported and services received from the
capital transferred to non-residents or foreigners. -
Reserve Bank of India
International Financial Management COC642B – BBA F&A Jan to May 2023
Balance of Trade
➢ The difference between a country's imports and its exports.
➢ Balance of trade is the largest component of a country's
balance of payments.
➢ Debit items include imports, foreign aid, domestic spending
abroad and domestic investments abroad. Credit items
include exports, foreign spending in the domestic economy
and foreign investments in the domestic economy.
➢ When exports are greater than imports than the BOT is
favorable and if imports are greater than exports then it is
unfavorable
International Financial Management COC642B – BBA F&A Jan to May 2023
Comparison
BOP BOT
1. It is a broad term. 1. It is a narrow term.

2. It includes all transactions related to 2. It includes only visible items.

visible, invisible and capital transfers. 3. It can be favourable or unfavourable.
3. It always balances itself. 4. BOT = Net Earning on Export - Net
4. BOP = Current Account + Capital Account payment for imports.
+ or - Balancing item (Errors and 5. Following are main factors which affect
omissions) BOT
5. Following are main factors which affect I. cost of production
BOP II. availability of raw materials
I. Conditions of foreign lenders. III. Exchange rate
II. Economic policy of Govt. IV. Prices of goods manufactured at
III. all the factors of BOT home

International Financial Management COC642B – BBA F&A Jan to May 2023

Components
The various components of a BOP statement

➢ Current Account
➢ Capital Account
➢ Reserve Account
➢ Errors & Omissions

International Financial Management COC642B – BBA F&A Jan to May 2023

Current account
➢ Export and Import of Goods (Merchandise Transactions or
Visible Trade)
➢ Export and Import of Services (Invisible Trade)- Travel,
shipping, banking, insurance etc.
➢ Unilateral or Unrequited (voluntary transfer by Govt)
Transfers to and from abroad (One sided Transactions) –
gifts, donations, remittances etc.
➢ Income receipts and payments to and from abroad –
Investment income and compensation to employees.

International Financial Management COC642B – BBA F&A Jan to May 2023

Current account

International Financial Management COC642B – BBA F&A Jan to May 2023

Capital Account
➢ The capital account records all international transactions that
involve a resident of the country concerned changing either his
assets with or his liabilities to a resident of another country.
Transactions in the capital account reflect a change in a stock –
either assets or liabilities.
➢ It is difference between the receipts and payments on account of
capital account. It refers to all financial transactions.
➢ The capital account involves inflows and outflows relating to
investments, short term borrowings/lending, and medium term to
long term borrowing/lending.
➢ Capital account is concerned with financial transfers. So, it does not
have direct effect on income, output and employment of the
country.
International Financial Management COC642B – BBA F&A Jan to May 2023
Capital account
➢ Borrowings and lending’s to and from abroad
➢ Investments to and from abroad.
➢ Short-term capital flows.
The transactions, which lead to inflow of foreign exchange (like receipt
of loan from abroad, sale of assets or shares in foreign countries, etc.),
are recorded on the credit or positive side of capital account. Similarly,
transactions which lead to outflow of foreign exchange (like repayment
of loans, purchase of assets or shares in foreign countries, etc.) are
recorded on the debit or negative side. The net value of credit and
debit balances is the balance on capital account.

International Financial Management COC642B – BBA F&A Jan to May 2023

Capital account

International Financial Management COC642B – BBA F&A Jan to May 2023

BOP

International Financial Management COC642B – BBA F&A Jan to May 2023

Disequilibrium
A disequilibrium in the balance of payment means its
condition of Surplus Or deficit
A Surplus in the BOP occurs when Total Receipts exceeds Total
Payments. Thus,
BOP= CREDIT>DEBIT
A Deficit in the BOP occurs when Total Payments exceeds Total
Receipts. Thus,
BOP= CREDIT<DEBIT

International Financial Management COC642B – BBA F&A Jan to May 2023

Causes of Disequilibrium in BOP
➢Cyclical fluctuations
➢Short fall in the exports
➢Economic Development
➢Rapid increase in population
➢Structural Changes
➢Natural Calamites
➢International Capital Movements

International Financial Management COC642B – BBA F&A Jan to May 2023

Measures to correct Disequilibrium in BOP
Monetary Methods
➢Monetary policies
➢Fiscal policies
➢Exchange rate depreciation
➢Devaluation
➢Deflation
➢Exchange control

International Financial Management COC642B – BBA F&A Jan to May 2023

Measures to correct Disequilibrium in BOP
Non Monetary Methods
➢Export promotion
➢Import substitute
➢Import controls
➢Quotas
➢Tariffs

International Financial Management COC642B – BBA F&A Jan to May 2023

Numerics
Example-1: Country A exports goods worth 500 to
Country B. The goods have been invoiced in and
will be paid for in Country B’s currency. Payment
will be effected by crediting the bank a/c which
country A exporter holds with a bank in country B.
The balance in such an a/c is a foreign asset in
country A and a foreign liability for country B.

International Financial Management COC642B – BBA F&A Jan to May 2023

Numerics
Example-2: Country A agrees to supply leather
goods worth 300 to Country B in return for crude
oil worth 300 both valued in Country B’s currency.
Example-3: A bank in Country A purchases
securities issued by the Govt. of Country B, valued
at 200 in B’s currency and pays for them by
drawing on an account it has with its
correspondent bank in country B
International Financial Management COC642B – BBA F&A Jan to May 2023
Numerics
Example-4: US government gives a US bank
balance of $10000 to the government of a
developing nation as part of the US aid
programme. In developing country BOP
Example-5: An Indian resident visits UK and
spends Rs.100000 on hotel and meals in UK
through Indian Traveler's cheques

International Financial Management COC642B – BBA F&A Jan to May 2023

Numerics
Example-6: From the following, record the transactions from the point of view of Country A and
prepare the current account of balance of payments statement:
a) Country A exports goods to B for $51000. B signs a bill of exchange for the goods they imported
from A.
b) B is a producer of gold and produces $1 million worth of gold and 10% is sold to As Central Bank.
For the gold exported to A, B accepts a deposit with the central bank of Country A. Also, Country A
imports goods from C for $800 and pays to the exporting Country C with a loan in C’s currency which
they get from A’s bank.
c) Citizen of A, migrated from Denmark a long time ago, inherits the property of his uncle. The
property consists of a farm house worth $2,000 and a deposit of $10,000 in Denmark bank.
d) Another resident of Country A, who has migrated from Britain, decides to gift his father $1200
and his father uses this money to buy bonds from another citizen of Country A.
e) Mr. Z (resident of A) makes a profit of $10,000 in the first year of operations in Country B which
Mr. Z uses to enlarge his business in Country B.

International Financial Management COC642B – BBA F&A Jan to May 2023