Balance of Trade and Balance of Payment.pptx

7/27/2019 Balance of Trade and Balance of Payment.pptx

1/19

Balance of Trade

vs Balance of Payment


2/19

What is Balance of Trade (BOT)

In todays world, all countries import some goods and servicesother countries, and they also export certain other goods andservices which are surplus in their country.

The difference between the value of goods and services exporout of a country and the value of goods and services importedthe country.

If a country has a balance of trade deficit, it imports more tha

exports, and if it has a balance of trade surplus, it exports moit imports.

The balance is said to be favourable when the value of the exexceeded that of the imports (i.e. exports exceedimports), and unfavourable when the value of the imports exthat of the exports (i.e. imports exceed exports).


3/19

What are the Factors That AffectBalance of Trade

Factors that can affect the balance of trade include:

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

The cost and availability of raw materials, intermediate goods and ot

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

Prices of goods manufactured at home (influenced by the responsive

supply)


4/19

Difficulties in Measuring Balance ofTrade

Sometimes it is difficult to measure accurately the Balance of Trade becaus

with recording and collecting data. One interesting example is the problem faced when official data for all the w

countries are added up. It is reported that in such a case, exports exceed ialmost 1%.

The question which baffles is as to why this difference?

Normally, both these should match.

However, it appears that the world is running a positive balance of trade wit

This cannot be true, because all transactions involve an equal credit or debiaccount of each nation.

The discrepancy is widely believed to be explained by transactions intendedmoney or evade taxes, smuggling and other visibility problems.

However, especially for developed countries, accuracy is likely.


5/19

Indias Balance of Trade

India recorded a trade deficit of 733.33 INR Billion in July of 2013.

Balance of Trade in India is reported by the Ministry of Commerce an India Balance of Trade averaged -122.75 INR Billion from 1978 until

reaching an all time high of 13.91 INR Billion in April of 1991 and a r1111.46 INR Billion in October of 2012.

India had been recording sustained trade deficits due to low exportshigh imports of coal and oil for its energy needs.

India is leading exporter of petroleum products, gems and jewelleryengineering goods, chemicals and services.

Main trading partners are European Union countries, United States, UAE.

Source: http://www.tradingeconomics.com/india/balance-of-trade


6/19


7/19


8/19

DefinitionThe Balance Of Payments of a country is a systematic record of

economic transactions between the residents of a country an

of the world.

It presents a classified record of all receipts on account of goods

services rendered and capital received by residents and paym

by them on account of goods imported and services received fr

capital transferred to non-residents or foreigners. ReservIndia (RBI)


9/19

What is Balance of Payment

Balance of Payment is a system of recording all the

economic transactions of a country, with the rest of theworld over a period, say one year.

Typically, the transactions included in BoP are country'sexports and imports of goods, services, financial capital,and financial transfers.

Thus, in nut shell we can say, the BoP accountssummarize international transactions for a specificperiod, usually a year, and are prepared in a singlecurrency, typically the domestic currency for the countryconcerned.


10/19

Importance of BoP The BoP is an important indicator of pressure on a co

foreign exchange rate . The BOP helps to forecast a countrys market potenti

especially in the short run.

Changes in a countrys BOP may signal the impositionremoval of controls over payment of dividends and in

license fees, royalty fees, or other cash disbursemenforeign firms or investors.


11/19

Balance of PaymentTo understand the same better, we can conclude : -

The balance of payments (BOP) is an accounting of a country'sinternational transactions for a particular time period.

Any transaction that causes money to flow into a country is a crBOP account, and any transaction that causes money to flow oudebit.

The BOP includes the current account, which mainly measures of goods and services; the capital account, which consists of catransfers and the acquisition and disposal of non-produced, nonassets; and the financial account, which records investment flo

The BOT is typically the biggest bulk of a country's balance of paymmakes up total imports and exports.

BOP is said to be favourable balance of payments, when more paycoming in than going out, and will be unfavourable when less paycoming in than what is going out.


12/19

Contents of BoP

Current account

Capital account

Financial account

Net errors and omissions accountReserves and related items: official

reserve account


13/19

Current account

Net export/import of goods (trade balance)

Net export/import of services

Net income (investment income from direct and portfolio investment plus

employee compensation)

Net transfers (sums sent home by migrants and permanent workers aboard,gifts, grants and pensions)


14/19

Capital account

Capital transfers related to the

purchase and sale of fixed assets such

as real estate


15/19

Financial account

Net foreign direct investment

Net portfolio investment

Other financial items


16/19

Net errors and omissionsaccount

Missing data such as illegal

transfers


17/19

Reserves and related items:official reserve account

Changes in official monetary reserves including gold, foreign exchange,and IMF position.


18/19

Basis ofDifference

Balance of Trade (BOT) Balance of Payment (BO

Definition Balance of Trade is defined as

'difference between export

and import of goods and

services'

Balance of Payment is def

'flow of cash between dom

and all other foreign coun

includes not only import agoods and services but als

financial capital transfer.

How is it

Calculated

BOT = Net Earning

on Exports - Net payment

made for imports

BOP = BOT + (Net Earning

investment i.e. payments

foreign investors) + Cash T

Capital Account +or - BalaorBOP = Current Account + C

Account + or - Balancing

and omissions)


19/19

Basis ofDifference

Balance of Trade (BOT) Balance of Payment (BOP)

When is itconsidered

as Favourable orUnfavourable?

If export is more thanimport, at that time, BOT will

be favourable. If import ismore than export, at that

time, BOT will beunfavourable.

Balance of Payment will be favourablesurplus in current account for paying y

her capital account.

Balance of payment will be unfavourabcurrent account deficit and it took mor

foreigners. After this, it has to pay higloan and this will make BOP

unfavourable.

Solution of

being Unfavourab

le

To Buy goods and services

from domestic country.

To stop taking of loan from foreign cou

Factors Following are mainfactors which affect BOT

a) cost of productionb) availability of raw materials

c) Exchange rated) Prices of goods

manufactured at home

Following are main factors which affecta) Conditions of foreign lenders.

b) Economic policy of Govt.c) all the factors of BOT

Balance of Trade and Balance of Payment.pptx

Documents