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A manufacturing organization considering expansion in India or China. Analyze the trends of the balance of payments accounts (including the current account, the capital account, and the overall balance of payments) over a 3-5 year period, on an annual or quarterly basis, for the proposed countries in your selected scenario. Be sure to interpret your findings. What conclusions can you draw from the BOP data and interpretations regarding your investment decision? (That is, does one country appear riskier or more favorable based on the analysis?)
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Balance of Payment:
As the word suggest, the payment should be balanced. This is a typical accounting book. Both the sides of the book should be balanced. The two sides of BoP are Current account and Capital account.
A Balance of payments (BOP) sheet is an accounting record of all monetary transactions between a country and the rest of the world. These transactions include payments for the country's exports and imports of goods, services, and financial capital, as well as financial transfers.
We have seen what a current account is...
To explain Capital accounts, in simple terms, it's the investments made into /out of the country.
A country is like an individual. Here,
When exports are more imports are less, we have current account surplus. Similar to more salary and less expenses. The reverse is deficit.
So now a country (individual) runs into deficit. How can he manage?
Reduce the expense
Borrow money from friends...
When a country does this, the options are
Reduce spending ( which is impossible for developing economy like us)
Increase exports (make it competitive, cheap, good products) - here is where the hero, china is accused of... using its currency to make its exporters win everywhere...( and there is joke in US and other western countries- there might be a day, when u can see your child labeled -made in china)
Borrow money- Make other countries to invest... FDI........
So, whenever you hear noise in the political scenes about bringing more foreign investment in India, this is the main reason... To bring more investment and bring down the imbalance.
So, to speak in terms of intellectuals, if a country is importing more than it exports, its trade balance will be in deficit, but the shortfall will have to be counter balanced in other ways - such as by funds earned from its foreign investments, by running down reserves or by receiving loans from other countries.
India's balance of payments (BoP) recorded a small surplus of $1.8 billion (Rs8,118 crore) in Q3FY10, smaller than the surplus of $9.4 billion recorded in the previous quarter. Quarter-on-quarter (q-o-q), there was a slowdown on the capital account side. The current account was largely stable.
Current account deficit stood at around $12 billion during the quarter under review, not showing much movement either on q-o-q or year-on-year (y-o-y) basis. Trade deficit, which was on a widening trend since March 2009, shrunk marginally for the first time (from around $32 billion in Q2 to about $31 billion in Q3). Exports climbed around 13% y-o-y during Q3FY10 after consecutive declines in the previous four quarters. Imports also registered a growth of 2.6% y-o-y after registering declines in the previous three quarters. This largely reflects the ongoing recovery in the domestic economy and global trade.
The invisibles account (net) declined somewhat on sequential basis from $20 billion in Q2FY10 to $18.7 billion in Q3FY10. ...
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