BALANCE OF PAYMENTS
STRUCTURE OF THE CURRENT ACCOUNT
OBJECTIVES
CONCEPT OF BALANCE OF PAYMENTS
BALANCE OF PAYMENTS is an account in which a country records all
its monetary transactions with the rest of the world periodically.
It usually contains tree different types of accounts viz:
• Current account (for goods and services imported and exported)
• Capital account (for investments, loans received or granted on long term
basis)
• Money movement account (for settlement of imbalances in the other
accounts)
Imbalances are the surplus and deficit.
SURPLUS occurs when receipts of a country exceeds her payments
while DEFICIT is seen when payments of any sort exceeds receipts
COMPONENTS OF THE CURRENT ACCOUNT
The current account is the key account in the balance of
payments as it is used to record all flows of incomes and
payments between a country’s residents and residents of
other countries.
It is split
into four
compone
nts viz:
• Trade in goods (import and export of visible goods)
• Trade in services (import and export of services/invisible
goods)
• Primary income (wages, rent and incomes on investments
received and paid)
• Secondary income (also known as current transfers such as
pensions, gift of money, foreign aids, social contribution,
welfare payments, taxes on primary income, etc.)
The balance of the current
account can be calculated
each period by adding
together the balance on each
section of the account.
Balance for each is gotten by
deducting payments from
receipts (that is, credits –
debits). Hence, balance of
current account = G + S + PI +
CT
Example and Activity on Current account
CONSEQUENCES OF TRADE IMBALANCES
The significant problems that could be
created by trade deficits includes:
Fall in the value of exchange rates
Escape of money from the economy
Less spending on locally produced
goods
High probability of imported inflation
Redundancy of factors of production
or unemployment due to low
demand of local products
Increase in debt burden due to
interest charges on loans
The significant problems that could be
created by trade surplus includes:
Political and economic pressure
on the government from other
countries
Probability of demand-pull inflation
Increase in the price of exports
due to higher currency value
Fall in demand and job losses
CORRECTING TRADE IMBALANCES
For deficits, government
can:
Manage the floating exchange rate or
devalue its currency against the currencies of
its major trade partners, and maintain a low
fixed exchange rate with them
Apply contractionary fiscal policy by
increasing taxes and cutting expenditure
Apply contractionary monetary policy by
increasing interest rates and selling bonds
Introducing and implementing trade barriers
(tariffs, quota, embargo, subsidies,
bureaucracy and excessive quality standards)
For
surplus,
govern
ment
can:
Manage the
floating
exchange
rate with its
major trade
partners, and
maintain a
high fixed
exchange
rate with
them
Use
expansionary
fiscal policy
Use
expansionary
monetary
policy
Remove
trade barriers.