128385785 Balance of Trade and Balance of Payment

BALANCE OF TRADE AND

BALANCE OF PAYMENT

CONTENTS :- INTRODUCTION STRUCTURE &COMPONENTS OF BOP A/C CURRENT ACCOUNT BALANCE DIFFERENCE BETWEEN BOT & BOP CAUSES OF DISEQUILIBRIUM IN BOP & BOT METHODS TO CORRECT DISEQUILIBRIUM BOP SITUATION IN INDIA FINANCING OF BOP DEFICIT

INTRODUCTION

BALANCE OF TRADE:- The difference between a country's imports

and its exports. Balance of trade is the largest component of a

country's BALANCE OF PAYMENTS. Debit items include imports, foreign aid,

domestic spending abroad and domestic investments abroad.

Credit items include exports, foreign spending in the domestic economy and foreign investments in the domestic economy.

BALANCE OF PAYMENTS:-

A record of all transactions made between one particular country and all other countries during a specified period of time.

Balance payment is the recording of the economic & financial flows that take place over a specified time period between residents & non-residents of a given country.

STRUCTURE AND COMPONENTS OF BALANCE OF PAYMENT ACCOUNTS

BOP A/C’s:-Principle of double-entry book-keeping.Credits are on left side i.e. credit transactions

and debits are on right side i.e. debit transactions.

Structure of balance of payment account are

as follows:-I. CURRENT ACCOUNTII. CAPITAL ACCOUNTIII. OFFICIAL SETTLEMENT ACCOUNT

CURRENT ACCOUNT:-

Current account includes three items :-I. VISIBLE TRADE(balance of trade)II. INVISIBLE TRADE(receipts and payments)III. UNILATERAL TRANSFERS(gifts donations)

CAPITAL ACCOUNTS :-

Capital accounts include:-I. SHORT TERM AND LONG TERM LENDING’S

AND BORROWING’S.II. PRIVATE AND GOVRNMENT INVESTMENTS.

OFFICIAL SETTLEMENT A/C

It is a part of capital account. It shows transactions in a country’s net

official reserve assets. ERRORS and OMMISSIONS is a balancing

item.

CURRENT ACCOUNT BALANCE

Current account balance shows the value of goods and services , income and gifts between the domestic and foreign countries.

If a country’s current account is in SURPLUS then,a. Net lenderb. Positive foreign investmentc. Savings more than its investing domestically If a country’s current account is in DEFICIT then,a. Net foreign borrowerb. Domestic savings less than domestic investmentc. Expenditure more than income

DIFFERENTIATION BETWEEN BOT & BOPBASIS OF DIFFERENCE

BOT BOP

1. DEFINITION Balance of trade may be defined as difference between export and import of goods and services

Balance of payment is flow of cash between domestic country and all other foreign countries. It includes not only import and export of goods and services but also includes financial capital transfer.

2. FORMULA BOT = Net Earning on Export - Net payment for imports

BOP = Current Account + Capital Account  + or - Balancing item ( Errors and omissions)

3. FAVOURABLE AND UNFAVOURABLE

If export is more than

import, at that time, BOT will be favorable . If import is more than export, at that time, BOT will be unfavourable.

It is favourable if one has surplus in current A/C to pay all the past loans in your capital A/C. It is unfavourable if one has a current A/C deficit and has taken loans from foreigners .They have to pay high rate of interest and thus have makes BOP unfavourable.

4. SOLUTION To Buy goods and services from domestic country.

To stop taking of loan

from foreign countries.

5. FACTORS a)Cost of productionb)Availability of raw materials.c)Exchange rated)Prices of goods manufactured at home.

a) Conditions of foreign lenders.

b) Economic policies of government.

c) All factors of BOT.

5.MEANING OF DEBIT AND CREDIT

If you see RBI, Overall balance of payment report, it shows debit and credit of current account. Credit means total export of different goods and services and debit means total import of goods and services in current account

Credit means to receipt and earning both current and capital account and debit means total outflow of cash both current and capital account and difference between debit and credit will be net balance of payment.

CAUSES FOR DISEQUILIBRIUM IN BOT:-

The trade balance is identical to the difference between a country's output and its domestic demand.

Measuring the balance of trade can be problematic because of problems with recording and collecting data.

As an illustration of this problem, when official data for all the world's countries are added up, exports exceed imports by almost 1%; it appears the world is running a positive balance of trade with itself.

FACTORS THAT AFFECT BALANCE OF TRADE :-

The cost of production (land, labor, capital, taxes, incentives, etc.) in the exporting economy vis-à-vis those in the importing economy.

The cost and availability of raw materials, intermediate goods and other inputs.

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).

CAUSES FOR DISEQUILIBRIUM IN BOP

A number of factors may cause disequilibrium in the balance of payments.

These various causes may be broadly categorized into: (i)Economic factors I. Development disequilibriumII. Capital disequilibriumIII. Secular disequilibriumIV. Structural disequilibrium(ii) Political factors(iii) Sociological factors(iv) Economic factors

METHODS OF CORRECTING DISEQUILIBRIUM

Rectifying the balance of trade Deflation Devaluation Exchange control International monetary fund Exchange depreciation Quotas Export promotion Import substitution

BOP SITUATION OF INDIA

The main components of INDIA’S BOP are:-I. Trade balanceII. Current accountIII. InvisibleIV. Capital accountV. ReservesCONCLUSION:- The balance of payment situation started

improving since 1992-93. There was a satisfactory balance of payment position in that period; the reasons are (i) High earnings from invisibles, (ii) Rise in external commercial borrowings, and (iii) Encouragement to foreign direct investment.

FINANCING OF BOP DEICIT

COMMON METHODS USED :- Using foreign exchange reserves External assistance

PROJECT DONE BY:-

MEGHANA SAXENA SHALAKA NAGARKAR