BBM Semester V International Business

Module 4
Export and Import procedures, Balance of Payments-Causes and measures of
Disequilibrium

Course Objectives for the module

 To equip the students with the fundamentals of International Business

 To equip the students with the fundamentals of foreign trade.
 To help students understand the current international business trends.
Course Outcomes for the module

 Explain the various concepts related to international business and foreign

trade.
 Design innovative strategies to see new global opportunities, employ available
and potential resources, manage risks, anticipate and overcome barriers, and
collaborate with international partners to create shared value.

Introduction
Export in itself is a very wide concept and lot of preparations is required by an
exporter before starting an export business.
To start export business, the following steps may be undertaken:

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BBM Semester V International Business

EXPORTABILITY OF PRODUCT

Exports and Imports shall be free, except in cases where they are regulated by the
provisions of this Policy or any other law for the time being in force. The item wise
export and import policy shall be, as specified in ITC(HS) published and notified by
Director General of Foreign Trade

MANDATORY DOCUMENTS FOR EXPORT & IMPORT

EXPORTS
1. Bill of Lading/ Airway Bill
The bill of lading is a document issued by the shipping company or its agent
acknowledging the receipt of goods on board the vessel, and undertaking to
deliver the goods in the like order and condition as received, to the consignee
or his order, provided the freight and other charges as specified in the bill
have been duly paid. It is also a document of title to the goods and as such, is
freely.

Contents
 Name and logo of the shipping line.
 Name and address of the shipper.
 Name and the number of vessel.
 Name of the port of loading.
 Name of the port of discharge and place of delivery.
 Marks and container number.
 Packing and container description.

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 Total number of containers and packages,

 Description of goods in terms of quantity.
 Container status and seal number.
 Gross weight in kg. and volume in terms of cubic meters.
 Amount of freight paid or payable.
 Shipping bill number and date.
 Signature and initials of the Chief Officer.
Prepared by Shipping Company.

2. Commercial Invoice cum Packing List

It is also known as a 'Document of Contents' as it contains all the information

required for the preparation of other documents. It is actually a seller's bill of
merchandise which contains the detailed description of the goods packed in
each case, their gross and net weight, etc. It is a prima facie evidence of the
contract of sale or purchase and therefore, must be prepared strictly in
accordance with the contract of sale.
Contents
 Name and address of the exporter.
 Name and address of the consignee.
 Name and the number of Vessel or Flight.
 Name of the port of loading.
 Name of the port of discharge and final destination.
 Invoice number and date.
 Exporter's reference number.
 Buyer's reference number and date.
 Name of the country of origin of goods.
 Name of the country of final destination.
 Terms of delivery and payment.
 Marks and container number.
 Number and packing description.
 Description of goods giving details of quantity, rate and total amount
in terms of internationally accepted price quotation.
 Signature of the exporter with date.
 Prepared by: Exporter

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3. Shipping Bill/ Bill of Export/ Bill of Entry

Shipping bill is the main customs document, required by the customs authorities for
granting permission for the shipment of goods. It is declaration by an importer or
exporter of the exact nature, precise quantity and value of goods that have landed or
are being shipped out. Prepared by a qualified customs clerk or broker, it is
examined by customs authorities for its accuracy and conformity with the tariff and
regulations
The cargo is moved inside the dock area only after the shipping bill is duly stamped,
i.e. certified by the customs. It is normally prepared in five copies
 Customs copy.
 Drawback copy.
 Export promotion copy.
 Port trust copy.
 Exporter's copy.
Contents
 Name and address of the exporter.
 Name and address of the importer.
 Name of the vessel, master or agents and flag.
 Name of the port at which goods are to be discharged.
 Country of final destination.
 Details about packages, description of goods, marks and numbers, quantity
and details of each case.
 FOB price and real value of goods as defined in the Sea Customs Act.
 Whether Indian or foreign merchandise to be re-exported
 Total number of packages with total weight and value.

Prepared and Verified by Customs Department

IMPORTS
1. Bill of Lading/ Airway Bill Bill of Lading/ Airway Bill.
The bill of lading is a document issued by the shipping company or its agent
acknowledging the receipt of goods on board the vessel, and undertaking to
deliver the goods in the like order and condition as received, to the consignee
or his order, provided the freight and other charges as specified in the bill

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have been duly paid. It is also a document of title to the goods and as such, is
freely

Contents
 Name and logo of the shipping line.
 Name and address of the shipper.
 Name and the number of vessel.
 Name of the port of loading.
 Name of the port of discharge and place of delivery.
 Marks and container number.
 Packing and container description.
 Total number of containers and packages,
 Description of goods in terms of quantity.
 Container status and seal number.
 Gross weight in kg. and volume in terms of cubic meters.
 Amount of freight paid or payable.
 Shipping bill number and date.
 Signature and initials of the Chief Officer.
Prepared by Shipping Company.
2. Commercial Invoice cum Packing List

It is also known as a 'Document of Contents' as it contains all the information

required for the preparation of other documents. It is actually a seller's bill of
merchandise which contains the detailed description of the goods packed in
each case, their gross and net weight, etc. It is a prima facie evidence of the
contract of sale or purchase and therefore, must be prepared strictly in
accordance with the contract of sale.
Prepared by: Exporter

Contents

a. Name and address of the exporter.

b. Name and address of the consignee.
c. Name and the number of Vessel or Flight.
d. Name of the port of loading.
e. Name of the port of discharge and final destination.
f. Invoice number and date.
g. Exporter's reference number.

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h. Buyer's reference number and date.

i. Name of the country of origin of goods.
j. Name of the country of final destination.
k. Terms of delivery and payment.
l. Marks and container number.
m. Number and packing description.
n. Description of goods giving details of quantity, rate and total amount
in terms of internationally accepted price quotation.
o. Signature of the exporter with date.
3. Bill of Lading
It is declaration by an importer or exporter of the exact nature, precise
quantity and value of goods that have landed or are being shipped out.
Prepared by a qualified customs clerk or broker, it is examined by customs
authorities for its accuracy and conformity with the tariff and regulations
Prepared and Verified by Customs Department

Other documents

This documents are required for effecting physical transfer of goods and their
title from the exporter to the importer and the realisation of export sale
proceeds.
Certificate of Origin
The importers in several countries require a certificate of origin without which
clearance to import is refused. The certificate of origin states that the goods
exported are originally manufactured in the country whose name is mentioned
in the certificate. Certificate of origin is required when:-
 The goods produced in a particular country are subject to’ preferential tariff
rates in the foreign market at the time importation.
 The goods produced in a particular country are banned for import in the
foreign market.
Contents of Certificate of Origin
 Name and logo of chamber of commerce.
 Name and address of the exporter.
 Name and address of the consignee.
 Name and the number of Vessel of Flight
 Name of the port of loading.
 Name of the port of discharge and place of delivery.
 Marks and container number.

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 Packing and container description.

 Total number of containers and packages.
 Description of goods in terms of quantity.
 Signature and initials of the concerned officer of the issuing
authority.
 Seal of the issuing authority.
 Certificate of inspection and quality control

It is issued usually by government agencies.

 Certificate of Insurance policy

It is given by the authorities of the Insurance company. Goods in transit are

subject to risk of loss of goods arising due to fire on ship, perils of sea, theft

etc. insurance protects losses incidental to voyages and in land transportation.

Insurance policy is one of the most important document used as collateral

security because it protects the interest of all those who have insurable

interest at the time of loss.

 Let Ship
After getting the approval from the custom officials, the exporter arranges for
the loading the products on the ship. Before loading takes place, the
exporter’s forwarding agent has to get the permission from the preventive
officer of the customer department. This permission is called the “let ship
order”
 Shipping Instructions
These instructions are given for shipment purpose to the clearing agent, so
that he may fulfill requirements of customs. These contain details regarding
the customs consignment like exporters name and address till the packing
details.
 Shipping Order
When the shipping instructions are given to the shipping company the
company in return gives an order which is known as shipping order stating
the name of the vessel goods to be exported, number of items etc, will be the
contents of the order.
 Carting Order

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The superintendent of the Port Trust issues the order for moving the goods in
to the port area after verifying the shipping bill and shipping order. This
order given by the superintendent is called the carting order.

 Mates Receipt
This is the receipt issued by the officer on duty on the ship on completion of
loading a consignment.
 Shipment Advice to Importer
After the shipment of goods, the exporter intimates the importer about the
shipment of goods giving him details about the date of shipment, the name of
the vessel, the destination, etc. He should also send one copy of non-
negotiable bill of lading to the importer.
 Bill of Exchange
The instrument is used in receiving payment from the importer. The importer
may prefer Bill of Exchange to Letter of Credit as it does not involve blocking of
funds. A bill of exchange is drawn by the exporter on the importer, to make
payment on demand at sight or after a certain period of time.
Parties to bill of exchange.

1. The drawer: The exporter / person who draws the bill.

2. The drawee: The importer / person on whom the bill is
drawn for payment.
3. The payee: The person to whom payment is made,
generally, the exporter / supplier of the goods.

 Consular Invoice
Consular invoice is a document required mainly by the Latin American
countries , Kenya, Uganda, Tanzania, Mauritius, New Zealand, Myanmar, Iraq,
Australia, Fiji, Cyprus, Nigeria, Ghana, Guinea, Zanzibar, etc. This invoice is
the most important document, which needs to be submitted for certification to
the Embassy of the importing country concerned. The main purpose of the
consular invoice is to enable the authorities of the importing country to collect
accurate information about the volume, value, quality, grade, source, etc., of the
goods imported for the purpose of assessing import duties and also for
statistical purposes. In order to obtain consular invoice, the exporter is required
to submit three copies of invoice to the Consulate of the importing country

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concerned. The Consulate of the importing country certifies them in return for
fees. One copy of the invoice is given to the exporter while the other two are
dispatched to the customs office of the importer's country for the calculation of
the import duty. The exporter negotiates a copy of the consular invoice to the
importer along with other shipping documents.
 Black List Certificate: it certifies that the ship/aircraft carrying the cargo has
not touched the particular country on its journey or that the goods are not
from the particular country. This is required by certain nations who have
strained political and economical relations with the so called “Black Listed
Countries”.
 Language Certificate: Importers in the European Community require a
language certificate along with the GSP certificate in respect of handloom
cotton fabrics
 Freight Payment Certificate: in most of the cases, bill of Exchange will
mention the transportation and other related charges. However if the
exporter does not want these details to be disclosed to the buyer, the shipping
company may issue a separate certificate for payment of the freight charges
instead of declaring on the main transport documents. This document
showing the freight payment is called the freight certificate.
 Combined Certificate of Origin and Value: this certificate is required by the
Commonwealth Countries. This certificate is printed in a special way by the
Commonwealth Countries. This certificate should contain special details as to
the origin and value of goods, which are useful for determining import duty.
All other details are generally the same as that of Commercial Invoice, such
as name of the exporter and the importer, quality and quantity of the goods
etc.
 Customs Invoice: this is required by the countries like Canada, USA for
imposing preferential tariff rates.
 Legalized Invoice: this is required by the certain Latin American Countries
like Mexico. It is just like consular invoice, which requires certification from
Consulate or authorised mission, stationed in the exporter’s country.
 Certificate of Conformity

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Export Process in India

Step 1. Receipt of an order
The exporter has to get himself registered with various authorities like RBI, income
tax authorities, etc. In addition, he has to appoint agents or distributors for collection
of orders from foreign countries. Exporter receives an order from importer directly
or through Indent House.
Step 2. Obtaining License and Quota

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After obtaining order, exporter has to secure export license from the government.
For this, he has to apply to the Export Trade Control Authority and obtain the valid
license. Quota is the total quantity of goods that is permitted for exports.
Step 3. Letter of Credit
Exporter demands letter of credit from importer or sometimes importer may send it
himself along with the order.
Step 4. Fixing exchange rate
Exchange rate means the rate at which the currency of one country is exchanged for
the currency of another country. It fluctuates from time to time. Hence the exporter
and importer fix the exchange rate mutually.
Step 5. Foreign exchange formalities
Here the exporter has to undergo certain foreign exchange formalities as laid down
under exchange control regulations. According to FERA (Foreign Exchange
Regulation Act of India) every exporter has to furnish a declaration in the form
prescribed for this purpose.
The declaration states :-
 Foreign exchange earned by way of exports will be disposed in the manner
and within the period specified by RBI.
 Negotiations of shipping documents will be through authorised dealers in
foreign exchange.
 The payment for goods exported will be collected only through approved
method.
Step 6. Preparation for executing the order
The exporter makes necessary arrangements for executing the order.
In this respect he performs the following activities :-
 Packing and marking of the goods as per the specifications of the importer.
 Arranging the pre-shipment inspection by the Export Inspection Agency and
getting the inspection certificate from it.
 Securing insurance policy from the Export Credit Guarantee Corporation
(ECGC) to get protection against the credit risks.
 Obtaining a suitable marine insurance policy, consular invoice and certificate
of origin, if required.
 Appointing a forwarding agent for handling the customs and forwarding
activities.
Step 7. Formalities done by forwarding agent
The Forwarding Agent completes the following formalities :-

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 Exporter obtains the Customs' Permit from the Customs Department for
exporting goods.
 The Forwarding Agent discloses the details of the goods such as their nature,
size, quantity, weight, etc. to the shipping company.
 The Forwarding Agent prepares a Shipping Bill.
 The Forwarding Agent prepares two copies of the dock challans and pays the
dock dues.
 The Captain of the ship gets the goods loaded on the ship on the basis of the
Shipping Order in the presence of customer officers.
 When the goods are loaded on the ship, the Mate (Vice Captain or the
Captain) issues a receipt, called Mate's or Captain's Receipt.
Step 8. Bill of Lading
The exporter approaches the shipping company, presents the Mate's Receipt and in
exchange receives a document called Bill of Lading. It is an official receipt given by
the shipping company as an acknowledgement of the receipt of goods to be
transported to the port of destination. It is also a contract for the carriage of goods. It
gives full description of goods loaded on the ship, name of the port of destination,
etc.
Step 9. Shipment advice to importer
The exporter sends Shipment Advice to the importer informing him about the
dispatch of the goods. He sends a copy of packing list, commercial invoice and a
non-negotiable copy of the Bill of Lading, along with the Advice Note.
Step 10. Presentation of documents to the bank
The exporter confirms that he has secured a complete set of the shipping documents
namely, the Bill of Lading, Marine Insurance Policy, Certificate of Origin, the
Consular Invoice and the Commercial Invoice. He then draws a Bill of Exchange on
the basis of the commercial invoice. The Bill of Exchange accompanied by these
documents is called Documentary Bill of Exchange. Such a bill may be a D/P
(Documents against payment) bill or D/A (Documents against Acceptance) bill. The
exporter hands over the documnetary bill to his bank.
Step 11. Realisation of export proceeds
For realization of export proceeds, the exporter has to undergo certain banking
formalities. Generally he receives payment in foreign currency by bill of exchange or
by bank draft.
Step 12. Follow up
After the sales, exporter should always have a follow-up, to find out buyer's

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reactions towards the goods. Such follow up builds goodwill and the exporter can
get more and more orders in future.

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Buyer: Importer/ Seller: Exporter

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Step 1. Obtaining import license and quota

In all countries there are many government regulations to be followed. Sanction of
government is necessary. Importer has to apply to the controller of imports for
getting necessary permission.
Importer has to attach the following documents to his application form :-
1. Receipt which shows that import license fee has been paid.
2. Certificate from a Chartered Accountant showing the total value of goods to be
imported.
3. Verification Certificate for income tax.
An import license may be general or specific. A general license allows imports from
any country. But specific license allows imports from specific country only.
The importer also has to obtain import quota certificate from the concerned
authority. It mentions the maximum quantity of goods which can be imported.
Step 2. Obtaining foreign exchange:
Before placing any order, the importer must apply to the Exchange Control
Department (ECD) of RBI (India's Central Bank) for the release of requisite foreign
exchange. The importer should forward the application through his bank. The ECD
verifies the application of the importer, and if found valid, sanctions the foreign
exchange for the particular transaction.
Step 3. Placing an order:
The importer may either place the order directly or through the indent house
(Agent). In case of canalised items, he obtains the imports through the canalizing
agency. (Canalisation means channelisation of goods through a government agency

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like MMTC). The importer cannot directly import such canalized items. They have to
place an order with the canalizing agency who shall import and supply the same.
Step 4. Dispatching letter of credit
After getting the confirmation from the supplier regarding the supply of goods, the
importer requests his bank to issue a Letter of credit in favour of supplier. It can be
defied as "an undertaking by importer's bank stating that payment will be made to
the exporter if the required documents are presented to the bank".
Step 5. Appointing clearing and forwarding agents
The importer makes arrangement to appoint clearing and forwarding agents to clear
the goods from the customs. Since clearing of goods is a specialized job, it is better to
appoint C & F agents.
Step 6. Receipt of shipment device:
The importer receives the shipment advice from the exporter. The shipment advice
states the date on which the goods are loaded on the ship. The shipment advice
helps the importer to make arrangement for clearance of goods.
Step 7. Receipts of documents :
The importer's bank receives the documents from the exporter's bank. The
documents include bill of exchange, a copy of bill of lading, certificate of origin,
commercial invoice, consular invoice, packing list, and other relevant documents.
The importer makes payment to the bank (if not paid earlier) and collects the
documents.
Step 8. Bill of entry :
This is a document required in case of import of goods. It is like shipping bill in case
of exports. A Bill of Entry is the document testifying the fact that goods of the stated
value and description in specified quantity are entering into the country from
abroad. The customs office supplies this form which is prepared in triplicate. Three
different colours are used to prepare bill of entry. One copy is retained by custom
department, other is retained by port trust and the third is kept by the importer.
Step 9. Delivary order:
The clearing agents obtains the delivery order from the office of the shipping
company. The shipping company gives the delivery order only after payment of
freight, if any.
Step 10. Clearing of goods
The clearing agent pays the necessary dock or port trust dues and obtains the port
Trust Receipt in two copies.

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Importer then approaches the Customs House and presents one copy of Port Trust
Receipt, and two copies of Bill of. Entry to the customs authorities. The customs
officer endorses the Bill of Entry Forms and one copy of Bill of Entry is handed back
to the importer. The importer then pays the customs duty and clears the goods. In
case, the customs duty is not paid, then the goods are stored in the bonded
warehouses. As and when the duty is paid, the goods are cleared from the docks.
Step 11. Payment to clearing and forwarding agent
The importer then makes the necessary payment to the clearing agent for his various
expenses and fees.
Step 12. Payment to exporter
The importer has to make payment to exporter. Usually, the exporter draws a bill of
exchange. The importer has to accept the bill and make payment.
Step 13. Follow up
The importer then informs the exporter about the receipt of goods. If there are any
discrepancies or damages to the goods, he should inform the exporter.

Foreign Exchange Market

The foreign exchange market provides the physical and institutional structure
through which the money of one country is exchanged for that of another country,
the rate of exchange between currencies is determined, and foreign exchange
transactions are physically completed.
Exchange Rate
Exchange Rate is a rate at which one currency can be exchanged into another
currency. In other words it is value one currency in terms of other.
US $ 1 = Rs.76.18
This rate is the conversion rate of every US $ 1 to Rs. 76.18
Types of the Exchange Rates
(A) Spot Exchange Rate: This refers to the price of foreign exchange in terms of
domestic money payable for the immediate delivery of particular foreign currency. It
is an existing or day-to-day exchange rate. It is an exchange of currencies on the spot.
In simple words that rate of exchange, which is effective for spot transactions is
known as the spot exchange rate. Actual delivery (electronic transfer) may take two
working days
Participants by Market in Spot Market
a. Commercial Banks
b. Brokers

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c. Customers of Commercial and Central Banks

(B) Forward Exchange Rate: Forward market is the financial market where two
parties comes under a personalized contract that represent claims to a certain
currency type, a specific price per unit and a future date for settlement. In simple
words, forward contracts are contracts between buyers and sellers where they agrees
to take future delivery on a price agreed upon today.
Participants by Market in Forward Market
a. Arbitrageurs
b. Traders
c. Hedgers
d. Speculators

Current Account Convertibility

 Current Account convertibility refers to currency convertibility required in
the case of transactions relating to exchange of goods and services, money
transfers and all those transactions that are classified in the current account.
 Freedom to residents to convert local financial assets into foreign assets,
and/or to take on foreign liabilities and invest proceeds in India or abroad.
 Freedom to non residents to create rupee assets or liabilities and alter them .
 And, say, Microsoft could issue a rupee bond in the Indian market.
 At the same time, capital account convertibility makes it easier for domestic
companies to tap foreign markets.
 Greater access for resident companies to foreign capital and debt markets –
reduce cost of capital
What is the difference between Capital Account and Current Account?

Capital Account Current Account

Capital account includes the cash Cash flows that result from trading
flows resulting from capital receipts products, services, and other incomes are
and expenditure. recorded in the current account.
The purpose of capital account is to Current account deals with receipts and
indicate the utilization of capital. payments of cash and other non-capital
items.
Capital account includes foreign Current account contains balance of
direct investment, portfolio trade, trading of services, net investment
investment, and government loans. income and net cash transfers.

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BALANCE OF PAYMENTS

The Balance of Payment (BOP) of a country is a systematic account of all economic

transactions between a country and the rest of the world, undertaken during a
specific period of time. BOP is the difference between all receipts from foreign
countries and all payments to foreign countries. If the receipts exceed payments,
then a country is said to have favourable BOP, and vice versa.
Definition
“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 (RBI)

The Balance of payments record is maintained in a standard double - entry book -

keeping method. International transactions enter into record as credit or debit. The
payments received from foreign countries enter as credit and payments made to
other countries as debit.

The following table shows the elements of BOP.

BALANCE OF PAYMENTS ACCOUNT

Receipts (Credits) Payments (Debits)

1. Export of goods. Imports of goods.

Trade Account Balance

2. Export of services. Import of services.

3. Interest, profit and dividends Interest, profit and dividends paid.
received.
4. Unilateral receipts. Unilateral payments.
Current Account Balance (1 to 4)
5. Foreign investments. Investments abroad.
6. Short term borrowings. Short term lending.
7. Medium and long term Medium and long term lending.
Capital Account Balance (5 to 7)
borrowing.

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8. Errors and omissions. Errors and omissions.

9. Change in reserves. (+) Change in reserve (-)
Total Reciepts = Total Payments

1. Trade Balance

Trade balance is the difference between export and import of goods, usually
referred as visible or tangible items. If the exports are more than imports, there will
be trade surplus and if imports are more than exports, there will be trade deficit.
2. Current Account Balance
It is the difference between the receipts and payments on account of current
account which includes trade balance. The current account includes export of
services, interest, profits, dividends and unilateral receipts from abroad and the
import of services, profits, interest, dividends and unilateral payments abroad. There
can be either surplus or deficit in current account. When debits are more than credits
or when payments are more than receipts deficit takes place. Current account
surplus will take place when credits are more and debits are less.
Current account balance is very significant. It shows a country's earning and
payments in foreign exchange. A surplus balance strengthens the country's
international financial position. It could be used for development of the country. A
deficit is a problem for any country but it creates a serious situation for developing
countries.
3. Capital Account Balance

It is the difference between receipts and payments on account of capital

account. The transactions under this title involves inflows and outflows relating to
investments, short term borrowings I lending, and medium term to long term
borrowings / lending. There can be surplus or deficit in capital account. When
credits are more than debits surplus will take place and when debits are more than
credits deficit will take place.

4. Errors and Omissions

The double entry book - keeping principle states that for every credit, there is
a corresponding debit and therefore, there should be a balance in BOP as well. In
reality BOP may not balance, due to errors and omissions. Errors may be due to
statistical discrepancies (differences) and omissions may be due to certain
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 BBM Semester V International Business

transactions may not get recorded. For Eg., remittance by an Indian working abroad
to India may not get recorded etc. If the current and capital account shows a surplus
of 20,000 $, then the BOP should show an increase of 20,000 $. But, if the statement
shows an increase of 22,000 $, then there is an error or omission of 2,000 $ on credit
side.

5. Foreign Exchange Reserves

The balance of foreign exchange reserve is the combined effect of current and
capital account balances. The reserves will increase when:-

a) The surplus capital account is much more than the deficit in current account.

b) The surplus in current account is much more than deficit in capital account.

c) Both the current account and capital account shows a surplus.

Distinction between Balance of trade & Balance of Payments

Basis of Difference Balance of Trade (BOT) Balance of Payment (BOP)

1. Definition Balance of Trade is defined as Balance of Payment is defined as the 'flow

'difference between export and of cash between domestic country and all
import of goods and services' other foreign countries'. It includes not only
import and export of goods and services but
also includes financial capital transfer.
2. How Is It BOT = Net Earning on Exports BOP = BOT + (Net Earning on foreign
Calculated? - Net payment made for investment i.e. payments made to foreign
imports investors) + Cash Transfer + Capital
Account +or - Balancing Item
or
BOP = Current Account + Capital Account
+ or - Balancing item ( Errors and
omissions)
3. When is it If export is more than Balance of Payment will be favourable, if
considered as import, at that time, BOT will the country has surplus in current account
Favourable or be favourable. If import is for paying your all past loans in her capital
Unfavourable? more than export, at that time, account.
BOT will be unfavourable. Balance of payment will be unfavourable, if
country has current account deficit and it

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 BBM Semester V International Business

took more loan from foreigners. After this,

it has to pay high interest on extra loan and
this will make BOP unfavourable.

4. Solution of being To Buy goods and services To stop taking of loan from foreign
Unfavourable from domestic country. countries.
5. Factors Following are main Following are main factors which affect
factors which affect BOT BOP
a) cost of production a) Conditions of foreign lenders.
b) availability of raw materials b) Economic policy of Govt.
c) Exchange rate c) all the factors of BOT
d) Prices of goods
manufactured at home

EQUILIBRIUM AND DISEQUILIBRIUM IN BOP

Balance of payments is the difference between the receipts from and

payments to foreigners by residents of a country. In accounting sense balance of
payments, must always balance. Debits must be equal to credits. So, there will be
equilibrium in balance of payments.
Symbolically, B = R - P
Where:
B = Balance of Payments
R = Receipts from Foreigners
P = Payments made to Foreigners
When B = Zero, there is said to be equilibrium in balance of payments.
When B is positive there is favourable balance of payments; When &. B is
negative there is unfavourable or adverse balance of payments.' When there is a
surplus or a deficit in balance of payments there is said : to be disequilibrium in
balance of payments. Thus disequilibrium refers to imbalance in balance of
payments.

CAUSES OF DISEQUILIBRIUM IN BOP

Any disequilibrium in the balance of payment is the result of imbalance
between receipts and payments for imports and exports. Normally, the term

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BBM Semester V International Business

disequilibrium is interpreted from a negative angle and therefore, it implies deficit in

BOP.
The disequilibrium in BOP is caused due to various factors. Some of them are
I. Import - Related Causes
The rise in imports has been the most important factor responsible for
large BOP deficits. The causes of rapid expansion of imports are
a) Population Growth
Population Growth may increase the demand for imported goods such
as food items and non food items, to meet their growing needs. Thus, increase in
imports may lead to BOP disequilibrium.
b) Development Programme
Increase in development programmes by developing countries may
require import of capital goods, raw materials and technology. As development is a
continuous process, imports of these items continue for a long time landing the
developing countries in BOP deficit.
c) Imports of Essential Items
Countries which do not have enough supply of essential items like
Crude oil or Capital equipments are required to import them. Again due to natural
calamities government may resort to heavy imports, which adversely affect the BOP
position.
d) Reduction of Import Duties
When import duties are reduced, imports becomes cheaper as such
imports increases. This increases the deficit in BOP position.
e) Inflation
Inflation in domestic markets may increase the demand for imported
goods, provided the imported goods are available at lower prices than in domestic
markets.
f) Demonstration Effect
When people of developing nations come into contact with those of advance
countries through economic, political or social relations there will be a
demonstration effect on the consumption pattern. It will increase need for import
whereas their export quantum remains same.

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BBM Semester V International Business

II. Export Related Causes

Even though export earnings have increased but they have not been sufficient
enough to meet the rising imports. Exports may reduce without a corresponding
decline in imports. Following are the causes for decrease in exports.
a) Increase In Population
Goods which were earlier exported may be consumed by rising population.
This reduces the export earnings of the country leading to BOP
disequilibrium.
b) Inflation
When there is inflation in domestic market, prices of export goods increases.
This reduces the demand of export goods which in turn results in trade
deficit.
c) Appreciation Of Currency
Appreciation of domestic currency against foreign currencies results in lower
foreign exchange to exporters. This demotivates the exporters.
d) Discovery Of Substitutes
With technological development new substitutes have come up. Like plastic
for rubber, synthetic fibre for cotton etc. This may reduce the demand for raw
material requirement.
e) Technological Development
Technological Development in importing countries may reduce their imports.
This can be possible when they start manufacturing goods which they were
exporting earlier. This will have an adverse effect on exporting countries.
f) Protectionist Trade Policy
Protectionist trade policy of importing country would encourage domestic
producers by giving them incentives, whereas, the imports would be
discouraged by imposing high duties. This will affect exports.

III. Other Causes

1. Flight of Capital
Due to speculative reasons, countries may lose foreign exchange or gold
stocks. Investors may also withdraw their investments, which in turn puts pressure
on foreign exchange reserves.
2. Globalisation

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 BBM Semester V International Business

Globalisation and the rules of WTO have brought a liberal and open
environment in global trade. It has positive as well as negative effects on imports,
exports and investments. Poor countries are unable to cope up with this new
environment. Ultimately they become loser and their BOP is adversely affected.
3. Cyclical Transmission
International trade is also affected by Business cycles. Recession or depression
in one or more developed countries may affect the rest of the world. The negative
effects of trade cycle (low income, low demand, etc.) are transmitted from one
country to another. For e.g. The current financial crisis in U.S.A. is affecting the rest
of the world.
4. Structural Adjustments
Many countries in recent years are undergoing structural changes. Their
economies are being liberalised. As a result, investment, income and other variables
are changing resulting in changes in exports and imports.
5. Political factors
The existence of political instability may result in disrupting the productive
apparatus of the country causing a decline in exports and increase in imports.
Likewise, payment of war expenses may also serious affect disequilibrium in the
country’s BOP. Thus political factors may also produce serious disequilibrium in the
country’s BOPs.
MEASURES TO CORRECT DISEQUILIBRIUM IN BOP
Any disequilibrium (deficit or surplus) in balance of payments is bad for
normal internal economic operations and international economic relations. A deficit
is more harmful for a country’s economic growth, thus it must be corrected sooner
than later. The measures to correct disequilibrium can be broadly divided into four
groups

Monetary Measures
1) Monetary Policy
The monetary policy is concerned with money supply and credit in the
economy. The Central Bank may expand or contract the money supply in the
economy through appropriate measures which will affect the prices.
a) Inflation
If in the country there is inflation, the Central Bank through its monetary policy
will make an attempt to reduce inflation. The Central Bank will adopt tight
monetary policy. Money supply will be controlled by increase in Bank Rate,
Cash Reserve Ratio, Statutory Ratio etc.

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 BBM Semester V International Business

The monetary policy measures may reduce money supply, and encourage
people to save more, which would reduce inflation. If inflation is reduced, the
prices of domestic market will decrease and also that of export goods. In foreign
markets there will be more demand for export goods, which would correct BOP
disequilibrium.
b) Deflation
During deflation the Central Bank of the country may adopt easy monetary
policy. It will try to increase money supply and credit in the economy, which
would increase investment. More investment leads to more production. Surplus
can be exported, which in turn may improve BOP position.
2) Fiscal Policy
Fiscal policy is government's policy on income and expenditure.
Government incurs development and non - development expenditure,. It gets
income through taxation and non - tax sources. Depending upon the situation
governments expenditure may be increased or decreased.
a) Inflation
During inflation the government may adopt easy fiscal policy. The tax
rates for corporate sector may be reduced, which would encourage more production
and distribution including exports. Increased exports will bring more foreign
exchange there by making the BOP position favourable.
b) Deflation
During deflation the government would adopt restrictive fiscal policy.
It may impose additional taxes on consumers or may introduce tax saving schemes.
This may reduce the consumption of citizens, which in turn may enable more export
surplus.
To restrict imports the government may also impose additional tariffs or
customs duties which may improve the BOP position.
3) Exchange Rate Policy
Foreign exchange rate in the market may directly or indirectly be influenced
by the Government.
a) Devaluation
When foreign exchange problem is faced by the country, the government
tries to reduce imports and .increase exports. This is done through devaluation of
domestic currency. Under devaluation, the- government makes a deliberate effort to
reduce the value of home country. If devaluation is carried out, then the exports will

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BBM Semester V International Business

become cheaper and imports costlier. This is turn will help to reduce imports and
increase exports.
b) Depreciation
Depreciation like devaluation lowers the value of domestic currency or
increases the value of foreign currency. Depreciation of a country's currency takes
place in free or competitive foreign exchange market due to market forces.
Depreciation and devaluation have the same effect on exchange rate. If there is high
demand for foreign currency than its supply, it will appreciate and vice versa.
However, in several countries the system of managed flexibility is followed. If there
is more demand for foreign exchange, the central bank will release the foreign
currency in the market from its reserves so as to reduce the appreciation of foreign
currency. If there is less demand for foreign exchange, it will purchase the foreign
currency from market so as to reduce the depreciation of foreign country and
appreciation of domestic currency.
Due to devaluation and depreciation of domestic currency, the exports
become cheaper and imports become expensive. This helps to increase exports.
4) Non-Monetary / General Measures :
A deficit country along with monetary measures may adopt the following
non-monetary measures too, which will either restrict imports or promote exports.
1) Tariffs
Tariffs refer to duties on imports to restrict imports. Tariff is a fiscal device
which may be used to correct an adverse balance of payments. The imposition of
import duties will raise the prices of imports. This will lead to a reduction in
demand for imports thereby improving the balance of payments position.
2) Quotas
Under Quota System, the government may fix and permit the maximum
quantity or value of a commodity to be imported during a given period. By
restricting imports through quota system, the deficit is reduced and the balance of
payments position is improved.
3) Export Promotion
The government may introduce a number of export promotion measures to
encourage exporters to export more so as to earn valuable foreign exchange, which
in turn would improve BOP Situation. Some of the incentives are Subsidies, Tax
Concessions, Grants, Octroi refund, Excise exemption, Duty Drawback, Marketing
facilities etc.
4) Import Substitution

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BBM Semester V International Business

Governments, especially, that of the developing countries may encourage

import substitution so as to restrict imports and save valuable foreign exchange. The
government may encourage domestic producers to produce goods which were
earlier imported. The domestic producers may be given several incentives such as
Tax holiday, Cash Subsidy, Assistance in Research & Development, Providing
technical assistance, Providing Scarce inputs etc.
CONCLUSION
From the above measures it is clear that more exports with import
substitution based on economic strength of the country are the real effective
solutions to correct the disequilibrium in the balance of payments.
Reference Questions
Section A – 2 Marks
1. What is Foreign Exchange Market?
2. What is Exchange Rate?
3. Mention the types of exchange rates.
4. What is Spot Exchange Rate?
5. What is Forward Exchange rate?
6. Distinguish between Current Account and Capital Account.
7. Distinguish between Balance of Payments and Balance of Trade.
8. What is Consular invoice ?
9. What is Certificate of origin?
10. What is Bill Lading ?
11. What is Packing List?
12. What is Bill of Exchange?
13. What is Bill of Entry?
14. What is Shipping bill ?
15. What is Shipping Instructions?
16. What is Let Ship?
17. What is Mates Receipt?
18. What is Shipping Order?
19. What is Carting Order?
20. What is Certificate of Inspection?
21. What is Current Account Convertibility?
22. Mention the types of Bill of Lading.
23. What is Black List Certificate?
24. What is Customs Invoice?
25. What is Legalized Invoice?
26. Who are the Participants in Forward Market?
27. Who are the Participants in Spot Market?
28. Who is the current Commerce minister of India?
29. Name any four currencies of Asian countries.
30. Name any four currencies of non Asian countries.

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BBM Semester V International Business

Section C- 10 Marks
1. Explain the causes of disequilibrium in Balance of Payments.
2. Explain the measures to correct disequilibrium in Balance of Payments
3. Disequilibrium in Balance of Payments is caused only by currency fluctuations.
Comment
4. Explain any 10 documents required for Exporting in India.
5. Explain the export process in India.
6. Explain the import process to India.
7. Importing in India has long documentation process. Comment
8. Disequilibrium in Balance of Payments is caused by Monetary Reasons. Comment
9. Disequilibrium in Balance of Payments is caused only due to failure in exports
promotion. Comment
10. Distinguish between Balance of Payments and Balance of Trade

References for the Chapter:

 International Business- Subba Rao
 International Business – N. Badi
 International Business Environment: Francis Cherumilam
 [Link]
 [Link]
 [Link]/
 [Link]/...BALANCE%20OF%20PAYMENT/Chapter%[Link]
 [Link]
[Link]
 [Link]
 [Link]
current-account/
 Kumar, Vinod. “Difference Between Current Account And Capital
Account.” Accounting Education. N.p., 24 Nov. 2009. Web. 07 Mar. 2017.
 [Link]
 [Link]
 [Link]
 [Link]
[Link]

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