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/Cs: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 ACCOUNT II. CAPITAL ACCOUNT III. 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 LENDINGS AND BORROWINGS. II. PRIVATE AND GOVRNMENT INVESTMENTS.

OFFICIAL SETTLEMENT A/C

It is a part of capital account. It shows transactions in a countrys net official reserve assets. ERRORS and OMMISSIONS is a balancing item.

CURRENT ACCOUNT BALANCE

a. b. c.

a.
b. c.

Current account balance shows the value of goods and services , income and gifts between the domestic and foreign countries. If a countrys current account is in SURPLUS then, Net lender Positive foreign investment Savings more than its investing domestically If a countrys current account is in DEFICIT then, Net foreign borrower Domestic savings less than domestic investment Expenditure more than income

DIFFERENTIATION BETWEEN BOT & BOP

BASIS OF DIFFERENCE 1. DEFINITION BOT Balance of trade may be defined as difference between export and import of goods and services BOP 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. a)Cost of production b)Availability of raw materials. c)Exchange rate d)Prices of goods manufactured at home.

To stop taking of loan from foreign countries.

5. FACTORS

a) Conditions of foreign lenders. b) Economic policies of government. c) All factors of BOT.

5.MEANING OF DEBIT AND CREDIT

Credit means to If you see RBI, receipt and earning Overall balance of both current and payment report, it capital account and shows debit and debit means total credit of current outflow of cash both account. current and capital Credit means total account and export of different difference between goods and services debit and credit will and debit means be net balance of total import of goods payment. and services in current account

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--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 disequilibrium II. Capital disequilibrium III. Secular disequilibrium IV. 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 INDIAS BOP are:I. Trade balance II. Current account III. Invisible IV. Capital account V. Reserves CONCLUSION: 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