Balance of payment &
Balance of trade
⚫Balance
of payment – record of all
economic transactions carried out by a
country with other countries.
⚫Balance
of trade – the difference b/w the
total amounts received on export &
payment made on export.
BOP
⚫“
a systematic record of all economic transactions
between the residents of a country and residents of
foreign countries” during a certain period of time.
⚫ Double
entry book keeping system.
⚫ Include
all receipts and payments made by a country
during a year.
Concept
⚫The
difference between receipts and
payments
BP Receipts
BP Payments
• costs of goods exported.
• money spent by foreign
tourists.
• payments of dividends and
interest from FDI abroad.
• new foreign investments
•
•
•
•
costs of goods imported.
spending by tourists abroad
new overseas investments.
cost of foreign aid.
COMPONENTS OF BOP
1.
Current Account
2.
Capital Account
3.
Unilateral Payments Account
4.
Official Reserve Assets Account
Current Account
⚫ Goods
account / Merchandise (visible)
it includes the value of merchandise exports &
imports.
•
If receipts exceeds payments – positive /favorable
balance.
•
If payments exceeds receipts – negative /
unfavorable balance .
•
If receipts equals payments – Zero goods balance.
Service account (Invisible)
⚫It
includes :
Banking , insurance & transportation
receipts and payments.
• Tourism transactions
• Receipts & Payments from students studying
abroad & foreigners in home country.
•
Capital Account
Includes Short term and long term capital
transactions.
⚫Long-term capital accounts
It includes the amount of capital that
has moved into or out of the country.
⚫Short-term capital accounts
⚫Unilateral transfer account
Means one-way transfer of an item from one
person to another. It includes gifts, grants &
aids receipts & payments
⚫Official Reserve Account
The official reserve account is a part of the
capital account, are the foreign currency and
securities held by the central bank of a
country and used to balance the payments
from year-to-year.
What is Balance of Payments Deficit?
A balance of payments deficit means the nation imports
more commodities, capital and services than it
exports.
It is a condition of balance of payment disequilibrium.
Reasons:
Economic Factors
1. Development Disequilibrium
2. Cyclical Disequilibrium
3. Secular Disequilibrium
Political Factors
Social Factors
Devaluation
● Devaluation is the deliberate downward
adjustment of a country's currency value.
● The government issuing the currency decides to
devalue a currency.
● A country which faces a serious problem of
deficit in the balance of payments may resort to
devaluation.
● This will discourage IMPORT and stimulate
export.
TRADE POLICY
Free Trade VS Protection
Tariff and Non Tariff barriers.
Balance of trade
⚫It
is the difference between the value of
goods and services exported and
imported by a country.
or
⚫Net exports (NX) is the difference
between the monetary value of exports
and imports of output in an economy
over a certain period.
⚫A
positive balance is known as a trade
surplus (exporting more than is
imported)
⚫A
negative balance is referred to as
a trade deficit or a trade gap.
Balance of Trade Surplus:
⚫A
surplus in the balance of trade arises if the value of
exports exceeds the value of imports. In terms of
"payments," this indicates that the domestic economy
is receiving a net inflow of payments from the foreign
sector. More payments coming in than going out
means the domestic economy has more income and
enhanced living standards.
⚫
Balance of Trade Deficit:
⚫A
deficit in the balance of trade arises if the value of
imports exceeds the value of exports. In terms of
"payments," this indicates that the domestic
economy has a net outflow of payments to the
foreign sector. Fewer payments coming in than going
out means the domestic economy has less income
and limited living standards.
Factors that can affect the balance
of trade include:
⚫
Cost of production
⚫
The cost and availability of raw materials
⚫
Exchange rate movements
⚫
Multilateral, bilateral and unilateral taxes or restrictions on trade
⚫
Non-tariff barriers such as environmental, health or safety standards
⚫
The availability of adequate foreign exchange with which to pay for
imports
⚫
Prices of goods manufactured at home (influenced by the
responsiveness of supply)
Why BOT
⚫ BOT
is a key indicator of international trade for
a country.
⚫ BOT data shows the imports and exports of
goods and how a country competes in a global
marketplace.
⚫ It can show a trade deficit & trade surplus