Balance of Payment
BoP, also known as balance of international payments, deals with an economy’s transactions with the rest of the world, for a specified time period. It involves goods, services and income, financial claims and liabilities and transfers such as gifts and foreign aid.
Balance of Payment involves two kinds of accounts –
Trade balance, or for India’s case, Trade Deficit, is a major component of Current Account Deficit. It the output in the economy can be characterised as Y, below equations can be derived as follows:
Y = C + I + G + NX
NX=Y– (C+ I + G )
NX = (Y– C– G ) – I
= S – I
C: Consumption; I: Investment; G: Government Spending; NX: Net Exports; S: Saving. As we can see from the above derivation, NX can also be expressed as the difference between saving and Investment.
Based on the above premise of rising current account deficit in the country, in this report we offer insights into the causes of CAD, identifying them as implicit or obvious causes, while also exploring some practical, situational and structural causes that account for worsening the current account balance in India. We map our analysis using IS model for open economy, use the data for trade balance, oil and gold prices for around past twenty years, from 1990-2013, to do a regression analysis that helps us comment on the correlation that might exist between the two statistics. We also explore J curve effect by analysing trends in currency exchange rate and trade balance for year 2013. Having established the causes of CAD, we explore the concept of twin deficit and its importance in the current account deficit discussion.
We then go on to listi...
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7. Why Is the U. S. Current Account Deficit so Large? Evidence from Vector Autoregressions, Daniel David Bachman, Southern Economic Journal, Vol. 59, No. 2 (Oct., 1992) (pp. 232-240)
8. Nicholas Apergis & Konstantinos Katrakilidis & Nicholas Tabakis, 2000. "Current account deficit sustainability: The case of Greece," Applied Economics Letters, Taylor and Francis Journals, vol. 7(9), pages 599-603.
9. India’s Experience with Capital Flows: The Elusive Quest for a Sustainable Current Account Deficit, Ajay Shah, IlaPatnaik, NBER Working Paper No. 11387, May 2005
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