Chapter # 6
International Trade
Prepared BY
Kokab Manzoor
Course Outline:
• Concept to International Trade
• Export and Import
• Balance of Trade (BOT)
• Favorable and Unfavorable Balance of trade
• Concept to Balance of Payment
• Favorable, unfavorable balance of payments.
• Causes of Adverse BOP
• Measures to remove deficit in BOP.
International Trade
International trade is the exchange of goods and
services across international boundaries or territories.
International trade is the act of export and import or
transaction of goods and services between different
countries of the world.
Exports:
Exports refers to those goods and services which are
sold by one country to another country.
Imports:
Imports refers to those goods and services which are
purchased by one country from another country.
Balance of Trade:
Balance of Trade is the difference between the values of
exports and imports of physical items of a country during a
given period of time.
BOT = (X – M)
• If export are greater than the imports i.e. X>M, The
Balance of Trade (BOT) is favourable.
• If exports are equal to imports i.e. X=M, The Balance of
Trade (BOT) is Balance.
• If exports are less than the import i.e. X<M, The Balance
of Trade (BOT) is Unfavourable.
Balance of Payment (BOP):
Balance of Payment is a record of all economic
transactions of a country with the rest of the world
during a period of one year.
Balance of Payment of a country is a systematic record
of its receipts and payments of international
transactions in a given year.
Major Components of BOP Accounting
system
1
•Current Accounts
•Capital Accounts
2
3
•Official settlements Accounts
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Major Components of BOP Accounting system
BALANCE OF PAYMENTS ACCOUNTS
Credits (+)
(RECEIPTS)
Debits ( -)
(PAYMENTS)
1. Current Account
Exports of,
a) Goods
b) Services
c) Transfer payments
Imports of,
a ) Goods
b) Services
c) Transfer payments
2. Capital Accounts
Borrowing s from Foreign countries
Lending to Foreign Countries
Direct Investment by Foreign Countries Direct Investment in Foreign Countries
3. Official Reserve Account
Increase in Foreign official
holdings e.g. official purchase of
foreign currency
Increase in Official Reserves of Gold and
Foreign Currencies
BOP Account Explanation
1)
CURRENT ACCOUNT
The current account of BOP consists of the receipts
and payments against
a) Exports and imports of goods,
b) Exports and imports of services
c) Transfer payments ( international grants, gifts and
foreign remittances both private and public etc)
9
BOP Account Explanation (cont..)
2) CAPITAL ACCOUNT
• Capital account consists transaction in financial assets
in form of short and long term lending and borrowings,
private and official investments
• This account shows capital mobility internationally for
short and long period of time
• Receipts and payments regarding foreign loans are
considered.
BOP Account Explanation (cont..)
3) OFFICAL RESERVE ACCOUNT
• Official Reserve Account include gold stock, holding
of foreign currencies
• It represents the “Foreign Exchange” position of a
country.
• It shows the change in a nation's official reserves
during one year
Causes of Adverse BOP:
Following are the main causes:
1
2
3
4
5
6
Export of primary goods:
Domestic inflation
Unfavorable Terms of Trade(TOT)
Import of capital goods
Higher payments for foreign services
Rise in prices of oil and fertilizers
Causes of Adverse BOP:
7 Inflation in International Market
8 Consumption oriented society
9 Decline in workers foreign remittance
10 Repayment of debt and interest
11 Devaluation
Remedial Measures to correct the Adverse BOP
The adverse balance of payment can be
corrected with the following way:
– Diversification of exports pattern
– Restoration of sick industries
– Reduction in export duties
– Production of high quality goods
– Creation of export processing zone (agencies)
– Devaluation
– Decrease in consumption
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