ICom Notes Class 12 Banking Balance of Trade, Balance of Payment and Correction of Adverse B O P

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Balance of Trade

Balance of trade refers to the difference in the value of imports and exports of commodities only i.e. visible items only. Movements of goods between countries is known as visible trade because the movement is open and can be verified by the custom officials with respect to balance of trade the following terminologies are important.

Balanced Balance of Trade

If during a given years exports and imports of the country are equal the balance of trade is said to be Balanced.

Favourable Balance of Trade

If the value of exports exceeds the value of imports the country is said to experience an export surplus or favourable balance of trade.

Un-Favourable Balance of Trade

If the value of imports exceeds the value of its exports the country is said to have a deficit or an adverse balance of trade.

Balance of Payment

Each nation periodically publishes a set of statistics that summarize for a given period all economic transactions between its residents and the outside world. This statistical statement is referred to as balance of payments. The accounts show how a nation has financed its international activities during the reporting period. They also show that what changes have taken place in the nations financial claims and obligations with the rest of the world.

STANDARD PRESENTATION

The IMF has significantly worked with success to standardize the system and the form of presentation.

B.O.P – DOUBLE ENTRY ACCOUNT

The B.O.P used double entry accounting. Transactions are recorded as credits of the yield receipts from or claims against foreign owners. Credits are received for example by exports of merchandise, sale of securities overseas and rendering services to foreigners. Similarly, debits are recorded of transactions cause payments to foreigners e.g. importing goods, tourist expenses abroad, purchase of foreign bonds.

B.O.P – CURRENT ACCOUNT

The Current Account includes merchandise trade in good and International Services are termed as Invisible trade. There are four basic service components. Tourism, Investment, Private Sector, Services such as royalties, rent, consulting and engineering fees etc and Government services such as diplomatic and buildings and membership fees in international organizations.

B.O.P – CAPITAL ACCOUNT

The capital account has a long term and a short term sector. The long term amount shows the inflow and outflow of capital commitments which have a maturity longer than a year. Short term capital movement frequently have a maturity date from 30-90 days. Long term capital items generally include loans to and from other governments, financial support for development. Projects abroad and export financing. Short term capital include paying for international services, selling accounts etc.

Adverse Balance of Payments

Following are same of the methods adopted for correcting and adverse balance of payments.

Improving the balance of trade through import restrictions & measures of export promotions

Since balance of payments becomes adverse because of excess imports over exports, so a country having such a problem must try to check imports either by total prohibition or by levying import duties so by a quota system. Another method may be import substitution i.e. trying to produce in the country what it currently imports. Exports can be stimulated by measures of export promotion granting subsidies or other concessions to industrialists and exports.

Depreciation of the currency

If a country depreciates its currency it proves very helpful in increasing the exports of goods. The value of the home currency fall relatively to foreign currency hence the foreigners are able to buy move goods with the same amount of their own currency or for the same amount of goods they have to pay less in terms of their own currency than before.

Devaluation

A country can turn the balance of payments in its favour by devaluating her currency. In this case also the devalued currency will become cheaper in terms of the foreign currency and the foreigners will be able to buy move goods by paying the same amount of their own currency. The effect is the same as in the case of depreciation.

Deflation

Deflation means construction of currency. If currency is contracted then according to the quantity theory of money the value of the currency will rise or the prices will fall. When prices fall the country becomes a good country to buy in and not a good country to sell into Exports will also thus increase and imports will be checked and hence the balance of trade will become favourable.

Exchange Control

Under a system of exchange control, all exporters are asked to surrender their claims or foreign currencies to the central bank which pays in return the home currency, which the exporters really want. This available foreign exchange is rationed by the central bank among the licensed importers. Thus imports are restricted to the foreign exchange available. There is no danger of more goods being imported than exported