B.Com Ist Year Balance Of Trade & Balance Of Payment Long Notes
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Balance of Trade and Balance of Payments Notes
Q.10. Distinguish between balance of trade and balance of payment. What are the reasons of disequilibrium in Balance of Payment? (meerut2014)
Ans. MEANING OF BALANCE OF TRADE
Balance of trade is defined as a difference between the value of goods that a nation exports and the value of goods that it imports during a given period of time, usually one year. In other words, balance of trade is concenred with exports adn imports of goods .Thus, Balance of Payment = Export of merchandise goods – Imports of mercandise goods Exports and imports of services are excluded from the preparation of balance oftrade account.
FORMS OF BALANCE OF TRADE STUDY NOTES
(1)Equilibrium Balance of Trade: When value of imports of goods is equal to the value of exports of goods. It is known as equilibrium balance of trade.
(2) Favourable Balance of Trade : If value of imports of goods is less than the value of exports of goods, that is known surplus, balance of trade.
(3) Unfavourable Balance of Trade: When a countryimportmore merchandise than it exports, there is import surplus and its balance is deficit or unfavourable.
EFFECTS OF UNFAVOURABLE BALANCE OF RADE NOTES
Main effects of unfavourable balance of trade on an economy are as follows:
(1) Adverse Exchange Rate : When there is import surplus then demand for home currency decline in the exchange market. Consequently, value of home currency will decline and affects the economy of a country badly.
(2) Reduction in Foreign Exchange Reserve : In the situation of unfavourable balance of payment, imports exceed exports and for the payment of excess imports we need more foreign currency. Due to this there becomes reduction in our foreign exchange reserve.
(3) Obstacles in the Path of Economic Development : Developing countries need capital goods, technique, machines and tools for its rapid development. But due to unfavourable balance of trade their foreign currency reserve gets reduced and foreign exchange rate also becomes adverse. Consequently, they do not get necessary resources for development and path of economic development gets blocked.
(4) Increase in Debt Burden : Due to unfavourable balance of trade, exchange rate of a country decline. In this situation we need more foreign currency to repay our debts. Thus, this increase the debt burden of a country,
(5) Reduction in international Economic Position : Balance of trade is treated as a indicator of economic position of a country. A country having adverse balance of trade is considered as low economic condition country. Therefore, it affects the economy of a country adversely.
MEANING OF BALANCE OF PAYMENT QUESTION ANSWER
The balance of payment of a nation is a systematic record of all economic transactions between the residents of a given country and the rest of the world. in a given period.
It presents a classified record of all receipts on account of goods exported, services rendered and capital received by residents, and payments made by them on account of goods imported and services received from and capital transferred to foreigners. Thus, balance of payments is a much wider term as compared to balance of trade. The balance of trade refers only to merchandise imports and exports, whereas the balance of payment refers to all economic transaction with the outside world. Thus, balance of payment includes imports, exports and invisibles (services) like amount for shipping, banking, insurance, technical service and tourism etc.
DIFFERENCE BETWEEN BALANCE OF TRADE AND BALANCE OF PAYMENT NOTES
| Basic of Difference | Balance of Trade | Balance of Payment |
| 1.Scope | Balance of trade is a narrow concept .it refers only ot the value of inports and exports of goods. | Balance of payment is more comprehensive in more comprehensive in scope. It includes all international economic transactions and items. |
| 2. Visible and Invisible Items | It includes only import and export o visible items. | It includes visible as well as invisible items. |
| 3. Nature of Transactions | It does not include the transactions of capital nature. Actulaay it is a part of the current account of balance of payment. | It records transactions of capital nature. |
| 4. Nature of Accounts | In accounting sense, it may be deficit or surplus. | Balance of payment as a whole must always be balanced. |
| 5. Indicator | It does not indicate truly the international monetary position of a country. | It is the true indicatior of international monetary position of a country. |
| 6. Significance | It is only a partial study of the total economic transactions, hence it has little analytical singnificance. | It has great analytical and economic significance. |
See Q. 11 for the reasons of disequilibrium in Balance of Payment
Q.11. Explain the concepts of balance of payment ? Trace out the reasons of disequilibrium in the balance of payment of a country and explain how can it be cor. rected ?
Ans. The balance of payment is a statistical statement of all foreign receipts and payments by country during a given year. Therefore, it is the residue of all foreign receipts and payments and the balance may be favourable or unfavourable. In this statement total of all receipts is credited and the total of all payments is debited.
BALANCE OF PAYMENT MUST ALWAYS BALANCE NOTES
Balance of payment is prepared in the terms of debits and credits based on a system of double entry book-keeping. In this system, each transaction has two aspects : debits and credits, which are equal in amount but appear on the opposite sides of the balance of payment account. If all the entries are made correctly, then total debits must equal total credit. Thus, in the accounting sense, balance of payment of a country must always balance.
Balance of payment statement has two parts: Current Account and Capital Account. In the current account trade balance and other receipts and payments during a year are included while capital account shows the international investment and debtness position of a country. ance of payment statry must always the accounti
However, a nation’s balance of payment must always balance while its accounts need not be in equilibrium. For Example, if there is debit balance on current account side then there must be credit balance on the capital account side. It become so because when a country has debit balance on current account then it import capital or export gold or receive donations. Due to this its credit in the capital account is extended to the extent of debit in the current account.
Thus, it becomes clear that there may be disequalibrium in the balance of payment of a country. When total receipts exceed total payments then there is surplus and it is regarded as a favourable balance. But when a country has to make more payments than what it receives, it is regarded as an unfavourable balance.
CAUSES OF DISEQUILIBRIUM IN THE BALANCE OF PAYMENT NOTES
Following are the main causes producing a disequilibrium in – the balance of payment of a country:
(1) Increase in Imports : Developing countries import raw materials, nachinery and equipment, spares and components for their rapid development. Due to excess payments for imports, there becomes disequilibrium in the balance of payment.
(2) Slow Growth in Exports : Due to lack of capital, low productivity, lack of industrialisation, exports are not considerably increased in the developing countries. Moreover their exports quantam of primary commodities may decline as newly created domesticindustries may require them. This create disequilibrium in the balance of payment of these countries.
(3) International Borrowing and Investment : When a country borrows heavily from another countries, then it would have to pay heavy amount for the payment of interest. This situation creates deficit in the balance of payment.
(4) High Rate of Population Growth:A country with a high rate of growth of population often faces an adverse balance of payments because the total demand for goods and services within the country cannot be met out of domestic production, again necessitating imports.
(5) Effect of Cyclical Fluctuations : Cyclical fluctuations induced by the operation of the trade cycles produce disequilibrium in the balance of payment of a developing country. When there occurs a business recession in foreign countries, it may easil, a fall in the exports and exchange earnings of the country con resulting in a disequilibrium in the balance of payment.
(6) Increasing Internal Prices: Increasing internal pri within the country also create disequilibrium in the balance payment. Increasing price cause a decline in the volume of export and also result in an increase in the volume of imports. Thus, create disequilibrium in the balance of payment.
(7) Trade Barriers : Every country wishes to limit importa and encourage exports. If the foreign countries raise trade barriere with a view to cutting down imports, this will limit the other countries, exports and will result in adverse balances of payments for them.
(8) Natural Calamities : Sometimes, natural calamities for instance, floods, droughts, etc. lead to a fall in production in the country. Under these circumstances the country has to import essential commodities to sustain its population. Exports also decline because of the damage to production, creating an adverse balance of payments. (9) Demonstration Effect : When people of the developing countries, come into contact with the people of advanced countries, there will desire to have western style goods and pattern of consumption. Due to this, their import rises whereas their export may remain the same or may even decline. This cause deficit in the balance of payment of developing countries.
(10) Miscellaneous Factors:Some other factors such as lack of proper use of foreign exchange reserves, higher cost of democracy, increasing defence expenditure, new substitutes for exports, changes in the habit, taste and fashion of the people may also cause disequilibrium in the balance of payment.
MEASURES OF CORRECTING DISEQUILIBRIUM IN THE BALANCE OF PAYMENT NOTES
There are various steps that can be taken in order to correct an adverse balance of payment. This can be done in several ways:
(1) Increase in Exports : Exports should be increased by giving subsidies and adopting export programmes for this purpose. Various types of concessions such as power supply at lower price, tax concessions, reducing export duties etc. can also be adopted to encourage exports. ns, reducing cons such as poprogrammes for the
(2) Reduction in Imports: To correct disequilibrium in the balance of payment, it is necessary that imports should be decreased. For this purpose government should impose import duties and can fix the maximum value of a commodity to be imported. Due to import duties, prices of the imported goods in the domestic market rise and demand for such goods therefore falls, This reduce imports and are therefore beneficial for the balance of payment. Import quota has also the immediate effect of restricting imports.
(3) Exchange Control : Under exchange control, the Central Bank releases foreign exchange only for essential imports and conserve the rest of the balance. All exporters are instructed to surrender the foreign exchange earned to the government and all importers have to collect foreign exchange from monetary authority for payments. The government allocates the foreign exchange to different heads according to the national priorities.
(4) Currency Devaluation : Devaluation means lowering of the value of the domestic currency in terms of foreign currencies. When a country devalue its currency, the domestic commodities became cheaper in international markets and therefore, the exports increase because of more demand for the domestic goods. Devaluation always discourage imports because they become dearer in the domestic market. Devaluation thus, helps in correcting the negative balance of payments.
(5) Deflation: Monetary policy may be used to correct a deficit in the balance of payment of a country. The deficit occur because of high import and low exports. This is to be reversed to check the deficit. In this regard the country may adopt deflationary money policy by raising the Bank rate and Restricting credit. Under deflation, prices fall which makes exports attractive and imports relatively costlier. This eventually leads to a rise in exports and fall in imports.
(6) Encouragement to Foreign Investments : The government should encourage the foreigners to invest funds in the country either by allowing them to set-up new industries or collaboration with the existing units by offering them all sorts of incentives and concessions. This provides extra foreign exchange which can be utilised to reduce the deficit in the balance of payments.
(7) Incentive to Foreign Tourists : The government should offer a number of incentives to foreign tourists. Incentives to foreion tourists increase foreign exchange earnings of the country which helps in reducing the deficit in the balance of payment.
(8) Foreign Loans: In order to reduce deficit in its balance of payments, the government of the country may take loans from foreign banks or governments or from international agencies. As the repayment of loans are spread over a long period, it helps the government to check the deficit in the balance of payments.
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