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Good evening sir
1.state the role of UNCTAD in solving the problems of developing countries in increasing their exports.
2.critically evaluate the success of STC of india in achieving the objectives for which it was established.
3.Describe commodity agreement.Analyse the capital movements and their effects on world trade transfer problems.
4.we always talk about Balance of payment difficulties.In last few months Indian economists are not much worried about BOP as they were earlier days?comment.

1.state the role of UNCTAD in solving the problems of developing countries in increasing their exports.
Most important objectives and functions of UNCTAD are given below:-
The objective of UNCTAD is (a) to reduce and eventually eliminate the trade gap between the developed and developing Countries, and (b) and to accelerate the rate of economic growth of the developing world.
The main Functions of the UNCTAD are:
(i) To promote international trade between developed and developing countries with a view to accelerate economic development.
(ii) To formulate principles and policies on international trade and related problems of economic development.
(iii) To make proposals for putting its principles and policies into effect, (iv) To negotiate trade agreements.
(iv) To review and facilitate the coordination of activities of the other U.N. institutions in the field of international trade.
(v) To function as a centre for a harmonious trade and related documents in development policies of governments.
The important activities of UNCTAD include (a) research and support of negotiations for commodity agreements; (b) technical elaboration of new trade schemes; and (c) various promotional activities designed to help developing countries in the areas of trade and capital flows.


UNCTAD's special role within the United Nations system is to examine trade and environment issues from a development perspective. UNCTAD covers a large number of issues of particular interest to developing countries, ranging from support for their participation in multilateral trade negotiations to commodity diversification, the promotion of trade in environmentally preferable products and harnessing traditional knowledge for development and trade.

In carrying out its activities, UNCTAD works closely with a number of international organizations, including the United Nations Environment Programme (UNEP), the World Trade Organization (WTO) and the United Nations Development Programme (UNDP), and civil society.


UNCTAD has developed a broad programme of technical assistance and capacity building in trade, environment and development. Some key elements are listed below.

Capacity Building Task Force for Trade, Environment and Development (CBTF)

UNCTAD and UNEP launched, in 2000, a Capacity Building Task Force for Trade, Environment and Development (CBTF) to help developing countries analyse linkages between trade and environment, deal with environment-related trade problems and trade-related environmental problems, and participate fully in multilateral negotiations.

Although small in terms of size and funding, the CBTF projects implemented so far have been very successful. In 2001, some 10 countries in Central America and the Caribbean were involved in a project to find ways of managing the disposal of used vehicle batteries. Training workshops covering a range of trade and environment issues were held in Cuba and Viet Nam, and projects on the environmental and social effects of trade policies  were initiated in Lebanon and Indonesia. The secretariat of the African, Caribbean and Pacific (ACP) countries hosted a CBTF meeting in Brussels to explore opportunities for production and trade in organic agricultural products from developing countries.

Several projects under a special CBTF component for the least developed countries (LDCs) are in the pipeline. These include activities for Lusophone countries and Cambodia and training for African LDCs .

CBTF activities are funded by the Governments of Germany, Norway, Sweden, the United Kingdom and the United States, as well as the European Commission.

CBTF is now poised for new and larger initiatives, particularly at the regional level.  New initiatives will be announced at the World Summit on Sustainable Development (WSSD).

UNCTAD/FIELD project on Building Capacity for Improved Policy Making and Negotiation on Key Trade and Environment Issues

UNCTAD and the London-based Foundation for International Environmental Law and Development (FIELD) have started a new project, funded by the UK Department for International Development (DFID), to assist selected developing countries of Asia, Africa and Latin America in building up their national and regional capacities to deal with trade, environment and development issues. Apart from supporting developing countries in improving national and regional coordination and participating in WTO negotiations and discussions, an important objective of the project is to help countries introduce legal and policy initiatives in specific trade and environment areas at the national level.

The UNCTAD technical assistance and capacity building programme to help developing countries participate more effectively in the WTO Post-Doha work programmes is now under way  

The programme includes a specific "window" on environmental issues. Developing countries themselves have requested that the following topics be included:

•   promotion of a "positive agenda": a specific programme on trade and environment issues of particular benefit to  developing countries;
•   support for understanding the development aspects and implications of multilateral environmental agreements;
•   market access;
•   environmental goods and services;
•   environmentally preferable products, in particular organic agricultural products;
•   agriculture and environment;
•   traditional knowledge;
•   training in trade and environment;
•   impact assessments.

The programme is implemented in close cooperation with WTO and the United Nations Environment Programme.

Training workshops on trade, environment and development

The UNCTAD secretariat has developed a training package on trade, environment and development. Eight modules have been developed, dealing with a range of issues:

•   Trade, environment and sustainable development – the international context;
•   Trade and environment in the multilateral trading system;
•   Environmental requirements and market access;
•   Trading opportunities for environmentally preferable products (EPPs);
•   Multilateral Environmental Agreements;
•   International standards for Environmental Management Systems, such as ISO 14001;
•   Harnessing traditional knowledge for trade and development;
•   Integrated trade assessments.

The training materials are adapted to the conditions and needs of the beneficiary country or region and are updated periodically to reflect changes in the relationship between trade and environment. They are available on-line to authorized users in beneficiary countries.

Training workshops have so far been held in Cuba, Viet Nam and Benin.


UNCTAD's BIOTRADE Initiative was launched in 1996 as a concrete response to the call of the Convention on Biological Diversity (CBD) to promote the sustainable use of biodiversity. The Initiative helps developing countries produce value-added products and services derived from biodiversity for both domestic and international markets.

It consists of a number of partnerships with national and regional organizations, which have their own networks of community workers in the field.  This public-private approach enables partners to address all aspects of the value chain of natural products, including market and policy issues. It also builds on the comparative advantages of each organization, creating synergies, minimizing duplication, and maximizing the use of scarce resources.

Among the activities carried out so far are the creation of market information systems, business development schemes and trade support services, and support for integration of sustainability criteria in productive processes.

National programmes have been established in Bolivia, Colombia, Ecuador, Peru, and Venezuela, in close collaboration with UNDP.

At the regional level, UNCTAD collaborates with the Andean Development Corporation (CAF) and the Andean Community of Nations (CAN) on the implementation of BIOTRADE in the Andean countries.


With the negotiation of the Kyoto Protocol and its final adoption in November 2001 in Marrakech, UNCTAD now focuses on the trade and investment aspects of the implementation of the Protocol. It also assists developing countries in preparing for the opportunities offered by the Kyoto Protocol, in particular the clean development mechanism (CDM). For instance, UNCTAD has been advising developing countries and countries with economies in transition on the formulation of national CDM implementation guides and appropriate domestic emissions trading schemes.  

In cooperation with the Earth Council Institute and the Climate Change Secretariat, UNCTAD has developed an e-learning facility to provide more effective learning opportunities on the various issues concerning the emerging carbon market.


Using the commodities sector to promote sustainable development
The focus of UNCTAD’s work on commodities is on maximizing the contribution of the commodity sector to the sustainable development of commodity-dependent developing countries and economies in transition.

In the modern world, increasing reliance on markets and private initiative gives rise to many new challenges. Enterprises need to acquire new marketing expertise and modern management skills. At the same time, policy makers are pressed to develop sound institutional and regulatory frameworks for markets to function in a fair and efficient manner and to ensure the social, economic and environmental sustainability of commodity production and natural resource exploitation. UNCTAD’s flexible approach allows it to respond constructively to varying requests from its member countries.

An important aspect of this work is the diversification of production and export structures in developing countries. The aim is to improve supply capacities and the ability of producers and exporters to respond in a timely and flexible manner to emerging market opportunities. Activities include:

•   the design and implementation of commodity sector development and diversification policies, and assessment of their social and sustainable development implications;
•   the identification of the special needs and concerns of commodity-dependent developing countries in multilateral trade negotiations;
•   the analysis of commodity value chains and international markets, and the distribution of gains from globalization and trade liberalization;
•   support for participation in international value chains;
•   the assessment of diversification as an option for mitigating the effects of low commodity prices on sustainable development;
•   the development and application of frameworks for planning regional development in areas depending on natural resource exploitation.

UNCTAD’s work on commodities and sustainable development also includes:
•   the analysis of recent developments and prospects in commodity markets;
•   the exploration, development and implementation of viable, innovative commodity finance mechanism;
•   the development of legal and regulatory reforms to ensure credit access on reasonable terms.

Based on the premise that production and trade of commodities can have both positive and negative effects on the environment and that there are ways of improving the sustainability of natural resources, UNCTAD and the Common Fund for Commodities (CFC) are launching a partnership for further sustainable development of the commodity sector in developing countries.
The initiative, which covers all aspects of the commodity economy, aims to strengthen the competitiveness of commodity production and increase developing country exports while minimizing negative environmental effects. It will address all three components of sustainable development:  economic growth, social development and environmental conservation. Poverty eradication and changing unsustainable patterns of commodity production and consumption, where they exist, will also be essential elements of the initiative. The areas targeted include:

•   environmentally sound intensification and diversification of agricultural production;  
•   sustainable livestock farming;
•   sustainable exploitation of forestry resources and fishery stocks;
•   combating desertification through appropriate commodity production;
•   sustainable development in mining areas and environmentally sound mining methods;
•   rehabilitation of mined-out areas and their return to other economic activities.

Sustainable tourism in the least developed countries (LDCs)

The tourism sector is one of the most important sources of national income. For many developing countries, tourism is the only economic sector to provide real trading opportunities. Since tourism plays an important role in improving living standards, it should be put to use to overcome poverty.

UNCTAD and the World Tourism Organization are currently developing a programme to promote sustainable tourism in LDCs.  Activities will aim at strengthening their capacity to benefit from international tourism.


Promoting FDI for sustainable development

As part of its Series on issues in international investment agreements (IIAs), UNCTAD has prepared a paper on the interface between environment and FDI. It discusses key issues in protecting the environment, the transfer of environmentally sound technologies (ESTs) and environmental management practices.

TNC contribution to sustainable development   

Together with the Copenhagen Business School and the European Business School in Germany, UNCTAD has examined transborder environmental management practices of Danish and German transnational corporations (TNCs) with operations in China, India and Malaysia.  

Investment promotion and good governance

To help the least developed countries improve the efficiency and transparency of their investment promotion practices, UNCTAD has launched a programme on Good Governance in Investment Promotion (GGIP). Programme activities at the country level include advisory work on how to reduce non-transparent practices and other “hassle costs” for investors, and the definition of concrete plans of action.  It also provides training to officials on investment-related good governance issues.  
The project focuses on LDCs which have shown a clear will to put in place a transparent, client-oriented administrative system to attract foreign investors and ensure that Governments' development priorities are met.


Intellectual property rights and development

UNCTAD and the International Centre for Trade and Sustainable Development (ICTSD) are implementing a capacity building project on intellectual property rights and development. The project, funded by the United Kingdom, deals with a number of concerns of Agenda 21, including biodiversity and biotechnology, and looks at the issues of traditional knowledge, folklore and cultural property.

Science and technology diplomacy

In June 2002, UNCTAD and Harvard University launched the Science and Technology Diplomacy Initiative which targets a number of areas of current diplomatic attention such as international arrangements on technology transfer, biotechnology and trade, managing technological risks and benefits, and standard setting. Environment and health requirements in international trade are one area where the benefits of science and technology diplomacy may turn out to be particularly important, making it easier for countries to share costs and resources and, at the same time, serving as insurance against bad commercial decisions and diplomatic failures.


Environmental accounting

One of the challenges of environmental accounting is to ensure that environmental costs and liabilities are adequately reported. Intended as a practical tool to measure and report more precisely on environmental and financial performance, UNCTAD has developed a methodology to calculate environmental performance indicators (EPIs).

In response to the lack of national accounting standards for environmental information disclosure in financial statements, UNCTAD has synthesized the existing guidance offered by various standard setters. Guidelines for reporting environmental costs and liabilities were also produced and endorsed by the Intergovernmental Working Group of experts on International Standards of Accounting and Reporting (ISAR). The guidelines will assist national standard setters, thus avoiding the risk of devising radically different solutions for the same problems. The EUs draft recommendation on environmental issues has been influenced by the guidelines.

2.critically evaluate the success of STC of india in achieving the objectives for which it was established.
•   The State Trading Corporation of India Ltd. (STC) is a premier International trading company of the Government of India  Its engaged primarily in exports, and imports operations.
 STC help private trade and industry in developing exports from the country.

Total        844 Equity (As on 31.03.12) 60 Crore (US$ 12.5 Million) Reserves 622 Crore (US$ 130 Million) Turnover (2011-12) 30,444 Crore (US$ 6.4 Billion)
A Miniratna Category-1 Central Public Sector Enterprise and a premier international trading company  13 branches across India covering all important trading centers including port towns  STC has own tank farms, warehouses, godowns at various locations in the country for storage of liquid/dry cargo
 STC has paid 20% dividend in FY12 & FY13
 Objectives of STC
 To develop core competencies in selected areas and exploit the market opportunities in these areas to the best advantage of the Corporation.  To make best use of financial strength of the Corporation in expanding its business.  To lay emphasis on quality of services to customers so as to develop long-term business relationship with buyers and suppliers in and outside the country.

 To create new infrastructure and make optimum utilisation of infrastructure available with the Corporation.  To strive to pay adequate returns to the stakeholders.  To fulfil Corporation’s social responsibility by following ethical business practices and reinforcing commitment to customers, employees, partners and communities.  To act as a facilitator to small and medium exporters and importers.
 14th rank in terms of net sales among 206 PSUs as per Public Enterprises Survey : 2009-10
 39th rank in terms of net sales among Top 500 Companies by Financial Express (Feb’2012).
 32nd rank in terms of net sales among Top 1000 Companies by Business Standard (Mar’2012).  Won Ist prize under the category of agencies supplying gold to export against replenishment during 2009-10 from Gems & Jewellery Export Promotion Council in October’2010.  Won award for Gentle Giant Miniratna – I (Largest Non-Manufacturing Company)Awards 2011  Won Greentech HR Excellence Award 2010 from Greentech Foundation, New Delhi for outstanding achievement in innovation in employee retention strategies.  Won Asia’s Best Employer Brand Award 2010 for Talent Management at Singapore. Awards & Ranking of STC

 Activities of STC
 STC arranges import/export of mass consumption items like rice, wheat, edible oils, pulses, sugar etc. from time to time as per instructions of the Government.  STC arranges import of Coal for NTPC and state power utilities.  STC also imports various types of equipments for the requirement of police, hospitals, sports, fishing and other departments of various State Governments.  STC undertakes supply of imported as well as domestically procured raw materials to its business associates.  STC remains insulated from market fluctuations and gets a fixed trading margin.
 EPC is also extended for procurement of raw materials for undertaking exports.  Items supplied under some arrangements include edible oils, pulses, ores, minerals, Jute goods, oil seeds, castor oil, molasses, maize etc.  STC is one of over 40 organisations and banks who are authorised to import bullion into the country.  Issuing of NOC for export of onion  Supplies to defence organizations through associates
 How STC useful to an Entrepreneur
 STC helps thousands of Indian entrepreneur to find markets abroad for their products  STC assists the businessman to use the best raw materials, guides and helps them manufacture products that will attract buyers abroad.  Financial assistance to new entrepreneur for exporters on easy terms.  STC also Assistance in the areas of marketing, technical know-how, quality control, packaging, documentation, etc.  STC acts as an expert guide for foreign entrepreneur who interested in Indian goods. For them, STC finds the best Indian manufacturers, undertakes negotiations, fixes delivery schedules, oversees quality control

 Corporate Social Responsibility of STC

 Rehabilitation of physically challenged BPL persons in J&K and Ahmedabad by providing them with artificial limbs, calipers, crutches, wheel-chairs, etc.  Installation of borewells in Hamirpur District, Himachal Pradesh.  Vocational Training Programme in beauty culture for slum women.  Supporting needy students of fine arts through scholarship programme.  Mid-day meal programme for underprivileged children of schools of Delhi/NCR  Solar Electrification of Village Doitra, Abu Road by providing Home Lighting& Street Lighting Systems

3.Describe commodity agreement.Analyse the capital movements and their effects on world trade transfer problem s.

Commodity agreements are international agreements designed to stabilise commodity prices in the interest of producers and consumers. They can include mechanisms to influence market prices by adjusting export quotas and production when market prices reach certain trigger price levels. They sometimes employ buffer stocks which release stocks of commodities onto the market when prices rise to a certain level and build them up when they fall.

Commodity prices and commodity agreements
The market for commodities is particularly susceptible to sudden changes in conditions of supply conditions, called supply shocks. Shocks such as bad weather, disease, and natural disasters are largely unpredictable, and cause commodity markets to become highly volatile. In comparison, markets for the final products derived from these commodities are much more stable.
As with petrol pump prices, the prices of finished goods rarely reflect changes in the prices of basic commodities from which they are derived. For example, cocoa and sugar prices fluctuate considerably as harvests vary from year to year, but the prices of confectionery rarely change from year to year. There are many reasons for this, including the following:
1.   The cost of the commodity input, such as cocoa, represents a small proportion of total costs of the final product, such as a bar of chocolate. The price of chocolate is largely determined by the refining, manufacturing, and packaging costs of the manufacturer, and the retailer’s costs including labour, rents and marketing costs.
2.   Indirect taxes, like VAT, often form a larger proportion of the price than commodity costs, and such indirect taxes tend to remain stable of time.
3.   The existence of stocks of commodities act as a buffer against sudden changes in commodity prices, so manufacturers will be using old stocks purchased at the old prices.
4.   Futures contracts help reduce some of the underlying volatility in commodity markets. In the case of cocoa, the large confectioners, such as Nestle and Cadbury-Schweppes, agree cocoa prices in advance by fixing contracts with suppliers, such as those based in the Ivory Coast and Ghana, the two largest cocoa exporters.
5.   Manufacturers and retailers may choose not to pass on cost changes following commodity price changes for a number of reasons, such as a preference for stable prices, or the need to remain price competitive.
Commodity agreements
Commodity agreements are arrangements between producing and consuming countries to stabilise markets and raise average prices. Such agreements are common in many markets, including the market for coffee, tea, and sugar.
Example - The International Cocoa Agreement
In 2003, an agreement was made between the seven main cocoa exporting countries, Cameroon, Ivory Coast, Gabon, Ghana, Malaysia, Nigeria and Togo, and the main importing countries including the EU members, Russia, and Switzerland. The main purpose of this agreement was to promote the consumption and production of cocoa on a global basis as well as stabilise cocoa prices, which had been falling steadily. The agreement was planned to continue until 2010.
Commodity agreements often involve intervention schemes, such as buffer stocks, and usually only last for a few years, whereupon they are re-negotiated. They differ from cartels such as OPEC, largely because discussions and negotiations involve both producer and consumer countries, unlike cartels, which are established to protect the interest of producers only.

International capital flows are the financial side of INTERNATIONAL TRADE.1 When someone imports a good or service, the buyer (the importer) gives the seller (the exporter) a monetary payment, just as in domestic transactions. If total exports were equal to total imports, these monetary transactions would balance at net zero: people in the country would receive as much in financial flows as they paid out in financial flows. But generally the trade balance is not zero. The most general description of a country’s balance of trade, covering its trade in goods and services, income receipts, and transfers, is called its current account balance. If the country has a surplus or deficit on its current account, there is an offsetting net financial flow consisting of currency, securities, or other real property ownership claims. This net financial flow is called its capital account balance.
When a country’s imports exceed its exports, it has a current account deficit. Its foreign trading partners who hold net monetary claims can continue to hold their claims as monetary deposits or currency, or they can use the money to buy other financial assets, real property, or equities (stocks) in the trade-deficit country. Net capital flows comprise the sum of these monetary, financial, real property, and equity claims. Capital flows move in the opposite direction to the goods and services trade claims that give rise to them. Thus, a country with a current account deficit necessarily has a capital account surplus. In BALANCE-OF-PAYMENTS accounting terms, the current-account balance, which is the total balance of internationally traded goods and services, is just offset by the capital-account balance, which is the total balance of claims that domestic investors and foreign investors have acquired in newly invested financial, real property, and equity assets in each others’ countries. While all the above statements are true by definition of the accounting terms, the data on international trade and financial flows are generally riddled with errors, generally because of undercounting. Therefore, the international capital and trade data contain a balancing error term called “net errors and omissions.”
Because the capital account is the mirror image of the current account, one might expect total recorded world trade—exports plus imports summed over all countries—to equal financial flows—payments plus receipts. But in fact, during 1996–2001, the former was $17.3 trillion, more than three times the latter, at $5.0 trillion.2 There are three explanations for this. First, many financial transactions between international financial institutions are cleared by netting daily offsetting transactions. For example, if on a particular day, U.S. banks have claims on French banks for $10 million and French banks have claims on U.S. banks for $12 million, the transactions will be cleared through their central banks with a recorded net flow of only $2 million from the United States to France even though $22 million of exports was financed. Second, since the 1970s, there have been sustained and unexplained balance-of-payments discrepancies in both trade and financial flows; part of these balance-of-payments anomalies is almost certainly due to unrecorded capital flows. Third, a huge share of export and import trade is intrafirm transactions; that is, flows of goods, material, or semifinished parts (especially automobiles and other nonelectronic machinery) between parent companies and their subsidiaries. Compensation for such trade is accomplished with accounting debits and credits within the firms’ books and does not require actual financial flows. Although data on such intrafirm transactions are not generally available for all industrial countries, intrafirm trade for the United States in recent years accounts for 30–40 percent of exports and 35–45 percent of imports.3
The bulk of capital flows are transactions between the richest nations. In 2003, of the more than $6.4 trillion in gross financial transactions, about $5.4 trillion (84 percent) involved the 24 industrial countries and almost $1.0 trillion (15 percent) involved the 162 less-developed countries (LDCs) or economic territories, with the rest, less than 1 percent, accounted for by international organizations.4 The shares of both industrial nations and the international organizations have been receding from their highs in 1998: 90 percent for industrial nations and 5 percent for the international organizations. In that year the combination of the Russian debt default and ruble devaluation, the south Asia financial crisis, and the lingering uncertainty about financial consequences of the return of Hong Kong to Chinese sovereignty in July 1997 drove the LDC share down to 5 percent of world capital flows.5 In the more tranquil five years following these crises, 1999–2003, LDC financial transactions involving mainland China and Hong Kong averaged 28 percent of the LDC total, and adding Taiwan, Singapore, and Korea brings the share to 53 percent of the developing-country transactions. Of the remaining forty-seven percentage points of developing-country transactions, Europe (primarily Russia, Turkey, Poland, and the Czech Republic) and the Western Hemisphere (primarily Mexico, Brazil, and Chile) each accounted for about sixteen percentage points, with the Middle East and Africa combining for the remaining sixteen percentage points.
Financing Trade in Goods, Services, and Assets
Figure 1 shows that most financial flows involve industrial countries whose gross flows (credits plus debits) during 1995–2003 averaged $4.9 trillion per year. Capital flows involving industrial countries comprised about 90 percent of total transactions, with LDCs and international organizations accounting for the remainder. Perhaps more significant, these gross flows were about ten times the net capital flows, reflecting the netting out of the vast majority of financial flows.
Figure 1 World Financial Flows

While much international trade is financed by offsetting trade flows, ultimately net trade balances must be financed by net financial flows. As Figure 2 shows, the United States has had large current-account deficits, primarily due to its deficit on merchandise trade; the non-U.S. industrial countries have had large trade surpluses; and LDCs, in aggregate, shifted from trade deficits to growing trade surpluses at the end of the twentieth century.
Net capital and financial flows finance these net trade imbalances, which, while primarily between industrial counties in gross terms, increasingly flowed, on net, from both developing and non-U.S. industrial countries to the United States. Reflecting their shift from trade deficits to trade surpluses at the end of the twentieth century, LDCs became net suppliers of capital in 1999 (Figure 3).
Figure 2 Current Account Balances (CABs)

Figure 3 Capital Account Balances (KABs)

Figures 2 and 3 contain two glaring anomalies. First, Figure 2 shows that the U.S. current account deficit is far larger than the sum of the current account surpluses of the other industrial countries and the LDCs. This implies that the world has been running a current account deficit with itself, something that is logically impossible because the sum of all transactions across all countries—with exports positive and imports negative—must be zero. That is, an export from China to France is an import by France from China. Because the world is a closed system (no country trades with Mars), if trade data were accurate, the sum of world trade in goods and services (including income and transfers) would be zero. Yet, according to the recorded data, the world ran a current account deficit averaging more than $95 billion annually during 1995–2003. Combined with estimated errors and omissions, these missing data constitute omitted exports and financial flows well in excess of $100 billion per year.6 Second, Figure 3 shows that the sum of capital outflows from the non-U.S. industrial countries and LDCs is far smaller than the reported inflow of capital to the United States. Thus, the world ran a substantial capital surplus—again, a logical impossibility (no borrowing from Mars). Although there is no agreed-upon explanation for these discrepancies, there are two possible reasons, depending on whether or not U.S. data on earnings from foreign direct INVESTMENT are accurate.
First, if the U.S. data are correct, then, because the sum of the U.S. current account deficit in Figure 2 and its capital account surplus in Figure 3 is close to zero, there must be underreported exports to the United States from the non-U.S. industrial countries and the LDCs, balanced by unreported financial flows from them to the United States.
Alternatively, suppose that the U.S. data on foreign direct investment earnings are not accurate, in particular that U.S. net income from its direct investments has been underreported.7 Reporting these earnings at their higher actual level would result in a reduction of the U.S. current account deficit (due to the increased income from “renting” capital to foreigners) and an equal reduction of the U.S. capital-account surplus.8
The available evidence makes the second explanation more likely than the first.
Composition of Capital and Financial Flows
Trade imbalances are financed by offsetting capital and financial flows, which generate changes in net foreign assets. These payments can be any combination of the following:

capital investments

portfolio investments in either debt or equity securities

direct investment in domestic firms (FDI) including start-ups

changes in international reserves9
As Table 1 shows, industrial countries financed their current account balances primarily with financial flows other than direct investment or reserve flows. Indeed, while the industrial countries were importing capital in the form of other financial flows, they were at the same time exporting capital as investors in the form of foreign direct investment (outflow of capital indicated by minus sign). The flow of net direct investment from industrial countries averaged −$115 billion during the nine years shown in Table 1 and was directed primarily to developing countries. These capital outflows were an important component of financing investment in the LDCs, where the foreign direct investment inflows averaged $154 billion, positive numbers indicating an inflow.
The difference between the industrial country outflow and the developing country inflow was primarily due to foreign direct investment in the United States, which averaged −$36 billion; that is, investors in LDCs were making substantial investments in the United States, much of it reflecting capital flight from insecure financial markets in LDCs to the greater security of PROPERTY RIGHTS in industrial countries. Because financial claims may be short term or long term, real or financial, the key to development is to raise long-term investments as a percentage of capital inflows into LDCs.10 Foreign direct investment—distinguished from portfolio investment by the investor’s substantial ownership share (>10 percent)—implies a greater commitment to a long-term interest in the investment project and an active interest in managing the project. While the United States has been, along with developing countries, the major recipient of direct investment inflows, it is also a major supplier of foreign direct investment.

4.we always talk about Balance of payment difficulties.In last few months Indian economists are not much worried about BOP as they were earlier days?comment.

The balance of payments provides us with important information about whether or not a country is “paying its way” in the international economy.
What is the Balance of Payments?
The balance of payments (BOP) records all of the many financial transactions that are made between consumers, businesses and the government in the UK with people across the rest of the World. The BOP figures tell us about how much is being spent by British consumers and firms on imported goods and services, and how successful UK firms have been in exporting to other countries and markets. It is an important measure of the relative performance of the UK in the global economy. At AS level we focus only on one part of the balance of payments accounts.
The balance of payments of a country is a systematic record of all economic transactions between the residents of the reporting country and residents of foreign countries during a given yeriod of time".

The balance of payment record is maintained in a standard double-entry book-keeping method. International transactions enter in to the record as credit or debit. The payments received from foreign countries enter as credit and payments made to other countries as debit.

Balance of Payment is a record pertaining to a period of time; usually it is all annual statement. All the transactions entering the balance of payments can be grouped under three broad accounts; (1) Current Account, (2) Capital Account, and (3) Official International Reserve Account. However, it can be vertically divided into many categories as per the requirement.

Structure of Balance of Payment (BOP) ↓

1. Trade Account Balance

It is the difference between exports and imports of goods, usually referred as visible or tangible items. Till recently goods dominated international trade. Trade account balance tells as whether a country enjoys a surplus or deficit on that account. An industrial country with its industrial products comprising consumer and capital goods always had an advantageous position. Developing countries with its export of primary goods had most of the time suffered from a deficit in their balance of payments. Most of the OPEC countries are in better position on trade account balance.
The Balance of Trade is also referred as the 'Balance of Visible Trade' or 'Balance of Merchandise Trade'.

2. Current Account Balance

It is difference between the receipts and payments on account of current account which includes trade balance. The current account includes export of services, interests, profits, dividends and unilateral receipts from abroad, and the import of services, interests, profits, dividends and unilateral Payments to abroad. There can be either surplus or deficit in current account. The deficit will take place when the debits are more than credits or when payments are more than receipts and the current account surplus will take place when the credits are more than debits.

3. Capital Account Balance

It is difference between the receipts and payments on account of capital account. The capital account involves inflows and outflows relating to investments, short tern borrowings/lending, and medium term to long term borrowing/lending. There can be surplus or deficit in capital account. The surplus will take place when the credits are more than debits and the deficit will take place when the debits are more than credits.

4. Foreign Exchange Reserves

Foreign exchange reserves (Check item No.9 in above figure) shows the reserves which are held in the form of foreign currencies usually in hard currencies like dollar, pound etc., gold and Special Drawing Rights (SDRs). Foreign exchange reserves are analogous to an individual's holding of cash. They increase when the individual has a surplus in his transactions and decrease when he has a deficit. When a country enjoys a net surplus both in current account & capital account, it increases foreign exchange reserves. Whenever current account deficit exceeds the inflow in capital account, foreign exchange from the reserve accounts is used to meet the deficit If a country's foreign exchange reserves rise, that transaction is shown as minus in that country's balance of payments accounts because money is been transferred to the foreign exchange reserves.
Foreign exchange reserves (forex) are used to meet the deficit in the balance of payments. The entry is in the receipt side as we receive the forex for the particular year by reducing the balance from the reserves. When surplus is transferred to the foreign exchange reserve, it is shown as minus in that particular year's balance of payment account. The minus sign (-) indicates an increase in forex and plus sign (+) shows the borrowing of foreign exchange from the forex account to meet the deficit.

5. Errors and Omission

The errors may be due to statistical discrepancies & omission may be due to certain transactions may not be recorded. For eg: A remittance by an Indian working abroad to India may not yet recorded, or a payment of dividend abroad by an MNC operating in India may not yet recorded or so on. The errors and omissions amount equals to the amount necessary to balance both the sides.
Funds flowing into, or out of, a country on account of various types of international transactions are recorded by the monetary authorities of that country in a prescribed statement that is known as the balance of payments. You find an individual maintaining an account of his/her cash receipts and payments. A company prepares a cash-flow statement that shows incoming and outgoing of cash. Similarly, a country records the inflows and outflows of funds in a statement known as the balance of payments. In other words, balance of payments is a statement that records all different forms of funds inflow and outflow and arrives at a conclusion whether there Is a net inflow in the country / outflow out of the country influencing, in turn, the foreign exchange reserves possessed by the country.
Thus any discussion of the balance of payments embraces the explanation of what the different forms of international financial flows are and how they are recorded in the balance of payments. It also involves the discussion of whether the balance of payments experiences any disequilibrium, and if it is there, what would be the ways to make necessary adjustments. These issues form the subject-matter of the present unit. However, the learners shall be acquainted with the recent trends in India's balance of payments in order to make the discussion even more meaningful.

The various types of transactions leading to international financial flows need some discussion here. Trade flows, invisibles, foreign direct and portfolio investment, external assistance and external commercial borrowings and some short-term flows International Financial
Merchandise Trade Flows
Trade may be related to goods. Alternatively, it may be related to services. The merchandise trade has two sides. While one is export, the other is import. If India exports various goods, it will get convertible currencies and that will be an inflow of funds. On the contrary, it has to make payments in convertible currencies for the imports it makes. Thus export and import of goods lead to international financial flows.
Invisibles include, broadly, trade in services, investment income and unilateral transfers. If an Indian shipping company carries goods of a foreign exporter/importer and gets the freight charges, it will be treated as inflow of funds on account of trade in services. Similarly, if a foreign shipping company carries goods of an Indian exporter, there will be outflow of funds in form of freight charges. There are many examples of international flow of funds on account of trade in services.
Investment income relates to the receipt and payment of dividend, technical service, fees, royalty, interest on loan, etc. A foreign company operating in India remits dividend, etc. to its home country that will represent an outflow of funds. Similarly, an Indian company operating abroad remits to India the dividend and other fees that will represent inflow of funds. Likewise, payment of interest on foreign borrowings represents outflow of funds. Any receipt of interest manifests in inflow of funds.
Unilateral transfers are unidirectional. They represent international financial flows without any services rendered. If an Indian makes a gift to his/her friend in England, it will be a case of outflow of funds on account of unilateral transfer. Similarly,
large number of Indians living abroad remit a part of their income to their family members living in India. This is a case of inflow of funds on account of unilateral transfer.
Foreign Investment
Foreign investment may be of two kinds. While one is direct, the other is portfolio. Foreign direct investment (FDI) occurs when a firm moves abroad for the production of goods or provision of services and participates in the management of that company located abroad. On the contrary, foreign portfolio investment (FPI) is not at all concerned with the production of goods and rendering of services. The sole purpose of a foreign portfolio investor is to earn a return through investment in foreign securities without any intention of grabbing the voting power in the company whose securities it purchases. In case of FDI too, an investor invests in the shares of a foreign company, but the sole objective is to enjoy the voting power and thereby a say in the management of the foreign company. Thus, it is primarily the voting right that differentiates between FDI and FPI.
Whatever the forms may be, inflow of fiends occurs when a foreign investor makes investment in the country. On the contrary, outflow of funds occurs when the domestic investor invests in a foreign country.
External Assistance and External Commercial Borrowings
External assistance and external commercial borrowings are different in the sense that while the former flows normally from an official institution -bilateral or multilateral, the latter flows from international banks or other private lenders. The rate of interest in the former is usually low along with a longer maturity period. The latter carries market rate of interest and a shorter
maturity. Last but not least, external assistance is manifest often in outright grant that does not require repayment of principal/interest payment. 40 Environment International Financial
Whatever may be the difference between the two, any borrowing from abroad is treated as inflow of fiends Lending abroad, on the other hand, represents outflow of funds, However, repayment of loads is treated just the other way,
Short-term Flow of funds
Normally loans and foreign direct investment are meant for a period exceeding one year 8tit there are financial flows that occur for less than a year. Movement of funds relating to banking channels, euro notes, speculative and arbitrage activities, etc. are the examples of short=term funds that move across countries.

Basic Principles
While recording the international financial flows in the balance of payments, a couple of norms need to be followed. One is that the structure of the balance of payments is based just on the principles of the double-entry book-keeping. It means that all the inflows of funds are put on the credit side and all the outflows of funds are debited; and ultimately, the two sides are balanced.
The second norm is that since the different forms of the financial flows vary in nature, they are to be entered accordingly in the two compartments of the balance of payments. It may be mentioned that the balance of payments statement is divided into two compartments. One is known as the current account followed by the other known as the capital account. Those transactions that represent earning or spending are recorded in the current account. For example, when a country earns foreign
exchange through export, the amount is entered in the current account. On the other hand, if' the financial flow does not represent earning, it is entered in the capital account. For example, foreign direct investment or foreign portfolio investment is entered in the capital account. Thus, it is on this basis that the different types of financial flows are recorded in the current and the capital accounts.
Prescribed Format for Recording transactions
Current Account
As per the prescribed format adopted by the Reserve Bank of India (shown in Table 4.1), in the current account, first, merchandise trade is entered. Export receipts are entered on the credit side and the imports are entered on the debit side. And then, the balance is found out. The difference between the export and the import is known as the balance of trade. Excess of export over import is known as the surplus balance of trade and, on the contrary, the excess of import over export is known as the deficit balance of trade.
The second item to be entered in the current account is nothing but invisibles.
Invisibles, as mentioned earlier, include primarily:
Trade in services
Investment income
Unilateral transfers

There are both inflows and outflows on account of invisibles. The inflows are entered on the credit side and the outflows are entered on the debit side. However, a common practice is that only the net amount is written in the current account.
After entering the invisibles, balancing is done for the whole of the current account. This balance is known as the balance of current account. The debit side being bigger than the credit side shows a deficit balance of current account. On the contrary, the excess of credit side over the debit side for the whole of the current account shows a surplus balance of current account.
Capital Account
In the capital account, foreign investment -both direct and portfolio - is entered, Sometimes, a part of the investment is taken back by the investors which is known as disinvestment; The usual practice is that the disinvestment are not shown, rather the foreign investment, net of disinterments, is shown in the capital account.
Similarly, external assistance and external commercial borrowing are also shown net repayment. Here the readers must be aware of the fact the repayment is subject matter of capital account whereas the interest payment showing a sort of earning is a part of invisibles. Again, the banking capital is inclusive of both short-term and long-term funds. Short-term credits are purely short-term funds. Finally, the two sides of long-term and short-term funds are balanced that is known as balance of capital account,

The Overall Balance
After the statistical discrepancy is located, the overall balance is arrived at. The overall balance represents the balancing between the credit items and the debit items appearing on the current account, capital account and the statistical discrepancy.

Official Reserves Account
If the overall balance is surplus, the surplus amount is transferred to the official reserves account that increases the foreign exchange reserves held by the monetary authorities. They comprise of monetary gold, SDR allocations by the IMF and the foreign currency assets. The foreign currency assets are normally held in the form of deposits with foreign central banks and investment in foreign government securities.
It there is deficit, an amount equivalent to the deficit is drawn from the official reserves account bringing the balance of payments into equilibrium. Again, if the amount of foreign exchange reserves is not sufficient to meet the deficit, the government approaches the Internation al Monetary Fund for the balance of payments support.

Accounting and Economic Equilibrium
Since the balance of payments is constructed on the basis of double-entry book keeping, credit is always equal to debit. If debit on current account is greater than the credit side, funds flow into the country that are recorded on the credit side of the capital account. The excess of debit is wiped out. It means that the balance of payments is always in accounting equilibrium.
The accounting balance is an ex post concept. It describes what has actually happened over a specific past period. There may be accounting disequilibrium for a short period when the two sides of the autonomous flows differ in size. But in such cases, accommodating flows bring the balance of payments back to equilibrium. To make the distinction between the autonomous flow and accommodating flow more clear, it can be said that foreign investment, external assistance and commercial borrowings are autonomous capital flow because they flows in normal course of business. But when the country borrows from the International Monetary Fund to meet the overall deficit, such borrowings represent accommodating capital flow.
However, in real life, economic equilibrium is not found because the two sides of the current account are seldom equal. Rather it is the economic disequilibrium in the balance of payments that is a normal phenomenon.
Process of Adjustment
The focus of adjustment lies primary on the trade account, although the size of adjusting deficit is sometimes reduced by the net inflow on the invisibles account. There are different views on adjustment that need a brief discussion here.
The Classical Approach
The classical economists were of the view that the balance of payments was self adjusting due to the price-specie-flow mechanism. The mechanism stated that an increase in money supply raises domestic prices. Exports become uncompetitive. Export earnings drop. Foreign goods become cheaper. Imports rise. Current account balance goes deficit in the sequel. Precious metal flows outside the country in order to finance imports. As a result, quantity of money lessens that lowers the price level. Lower prices in the economy lead to greater export. Trade balance reaches back to equilibrium.
Elasticity Approach
The adjustment in the balance of payments disequilibrium is thought of in terms of changes in the fixed exchange rate, that is through devaluation or upward revaluation. But its success is dependent upon the elasticity of demand for export and import.

The elasticity approach is based on partial equilibrium analysis where everything is held constant except for the effects of exchange rate changes on export or import. It is also assumed that elasticity of supply of output is infinite so that the price of export in home currency does not rise as demand increases, nor the price of import falls with a squeeze in demand for imports. Again, the approach ignores the monetary effects of variation in exchange rates.
If the elasticity of demand is greater than unity, the import bill will contract and export earnings will increase as a sequel to devaluation. Trade deficit will be removed. However, the problem is that the trade partner may also devalue its own currency as a retaliatory measure. Moreover, there may be a long lapse of time before the quantities adjust sufficiently to changes in price. Till then, trade balance will be even worse than that before devaluation.
Stem (1973) incorporated the concept of supply elasticity in the elasticity approach. Based on the figures of British exports and imports, Stem has come to a conclusion that the balance of trade should improve if:
1. Elasticity of demand for exports and imports is high and is equal to one coupled with elasticity of supply both for imports and exports which is either high or low.
2. Elasticity of demand for imports and exports is low but the elasticity of supply for imports and exports is lower.
On the contrary, if the elasticity of demand is low matched with high elasticity of supply, the balance of trade should worsen.
Monetary Approach
The monetarists believe that the balance of payments disequilibrium is a monetary phenomenon and not structural (Connolly, 1978). The adjustment is automatic unless the government is intentionally following an inflationary policy for quite a long period. Adjustment is brought about through making changes in monetary variables.
The process of adjustment varies among the types of exchange rate regime the country has opted for. In a fixed exchange rate regime or in gold standard, if the demand
for money, that is the amount of money people wish to hold is greater than the supply of money, the excess demand would be met through the inflow of money from abroad. On the contrary, with the supply of money being in excess of the demand for it, the excess supply is eliminated through the outflow of money to other countries. The inflow and the outflow influence the balance of payments. To explain it further, with constant prices and income and thus constant demand for money, any increase in domestic credit will lead to outflow of foreign exchange as the people will import more to lower the excessive cash balances. In the sequel, the balance of payments will turn deficit. Conversely a decrease in domestic credit would lead to an excess demand for money. International reserves will flow in to meet the excess demand. Balance of payments will improve.
However, in a floating-rate regime, the demand for money is adjusted to the supply of money via changes in exchange rate. Especially in a situation when the central bank makes no market intervention, the international reserves component of the monetary 46 Environment
• All the international financial flows arising out of various international financial transactions are recorded by the monetary authorities of a country in a statement known as balance of payments.
• The international financial flows relate broadly to merchandise trade flows, invisibles such as trade in services, investment income and unilateral transfers, foreign direct and portfolio investment, external assistance and external commercial borrowings and also short-Term movement of funds.
• Recording of funds flow in the balance of payments is based on the double-entry book-keeping having debit and credit entries.
• Balance of payments entries are bifurcated into current and capital accounts based on whether, or not, those entries show the flow of real income.
• While the current account includes merchandise trade and invisibles, capital account embraces foreign investment, external assistance, external commercial borrowing and the movement of short-term funds.
• Statistical discrepancy, if any, is added and then the current account, capital account and the statistical discrepancy are summed up in order to arrive at the overall balance. If the overall balance is positive, it adds to the foreign exchange reserves. If it is negative, foreign exchange reserves are eroded to that extent; or in case of insufficient reserves, IMF is approached to bridge the deficit.
1. Trade Account Balance

2. Current Account Balance

3. Capital Account Balance

4. Foreign Exchange Reserves

Merchandise Trade Flows
Invisibles include, broadly, trade in services, investment income and unilateral transfers.
Foreign Investment
Short-term Flow of funds
Current Account
Capital Account

Official Reserves Account
Process of Adjustment
Monetary Approach


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