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Sem 5 Prep
← Open Economy MacroThe balance of payments, Indian style

Formulas for this chapter

Balance of trade

BOT = exports of goods - imports of goods

The narrow measure, visible items only. Use it as a sub-total on the way to the current account balance, never as the headline answer.

Exports of goods
Merchandise sold abroad, a credit
Imports of goods
Merchandise bought from abroad, a debit

Current account balance

CAB = BOT + net invisibles net invisibles = net services + net transfers

Whenever a question gives goods, services and transfers. This is the measure to judge an external position on, not the balance of trade.

Net services
Factor income (interest, dividends) plus non-factor services (IT, tourism, banking, insurance), net
Net transfers
Remittances, gifts and foreign aid, net

BoP identity

Current account + capital account + errors and omissions = change in foreign exchange reserves

To find the reserve movement, or to find a missing item when the reserve movement is given. Keep every sign; errors and omissions can be negative.

Change in reserves
Positive means an accretion and a BoP surplus; negative means the RBI sold forex to cover a deficit
Errors and omissions
The statistical residual that closes an imperfectly measured account

Invisibles coverage ratio

Coverage % = net invisibles / size of merchandise deficit x 100

To say in one number how much of a goods deficit the services and remittance surplus absorbs. The denominator is the deficit, not imports.

Net invisibles
Net services plus net transfers
Merchandise deficit
Imports of goods minus exports of goods, taken as a positive size
Step 3 of 23
The real wordsTheory

Two main accounts

The deck splits the statement in two.

  • Current account: goods, services and transfers. Everything to do with current production and current income.
  • Capital account: capital transfers and the acquisition or disposal of non-produced, non-financial assets, such as patents.

In the Indian presentation the capital account is where FDI, portfolio flows, external borrowings and banking capital sit. In the Salvatore presentation those live in a separate financial account and the capital account is a small residual. Chapter 3 handles that clash directly.

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