INTERNATIONAL TRADE & BUSINESS

Under guidance-

PRESENTED BY_

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. A country has a trade deficit if it imports more than it exports; the opposite scenario is a trade surplus.

Also referred to as "trade balance" or "international trade balance."

BALANCE OF PAYMENTS

CONTENTSMeaning

Objective

Characteristics

Structure

ComponentsBalance of payments ‘Surplus’ and ‘Deficit’Ways of Measuring of Deficit and SurplusMeaning of disequilibrium in balance of paymentsCauses of disequilibrium in balance of paymentsMeasures to correct disequilibrium in Balance of Payments

BALANCE OF PAYMENTS

“A record of international transactions between residents of one country and the rest of the world”

OBJECTIVE

Its main objective is to represent

the economic position of a country,

whether its currency is rising or falling

in its external value.

CHARACTERSTICS OF BALANCE OF PAYMENTS

It is statement having two sides.

It is a record of economic transaction.

It shows a relation between receipts &

payments.

Visible & Invisible items both are included in

this statement.

It is prepared for a certain period of time.

STRUCTURE OF BALANCE OF PAYMENTS ACCOUNTS

• The balance of payments account of a

country is based on the principle of double-

entry book-keeping.

Each transaction is entered on the

credit and debit side of statement. But

balance of payments accounting differ from

business accounting in one respect. In

business accounting, debit(-) are shown on

the left side

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and credits (+) on the right side of statement .

But in the balance of payments accounting,

debits are shown on the right side and credits

on the left side of the statement. For example:

When a payment is received from a foreign

country, it is a credit transaction while

payment to a foreign country is a debit

transaction.

COMPONENTS OF BALANCE OF PAYMENTSCURR

ENT ACCO

UNT

• The current account of a country consists of all transactions related to trade in goods and services and unilateral transfers.

CAPITAL

ACCOUNT

• The capital account of a country consist of its transaction in financial assets in the form of short-term and long-term lending and borrowing.

Table. Balance of payments accountCURRENT ACCOUNT

EXPORTS•Goods•Services•Transfer payments

IMPORTS•Goods•Services•Transfer payments

CAPITAL ACCOUNT

Borrowings from Foreign countriesinvestments by foreign countries

Lending to foreign countriesDirect investments by foreign countries

OFFICIAL SETTLEMENTS ACCOUNT

Increase in Foreign Official Holdings

Increase in Official Reserve of Gold and Foreign Currencies

ERRORS AND OMISSIONS

Credits(+) (Receipts) Debits(-)Payments

Major items of India’s balance of payments (us$ million)

1007-08(PR) 1008-09(P) April-Dec(1008-09)(PR)

April-Dec(1009-1010)(P)

Export 166163 175184 150510 114473

Import 157789 194587 148967 113988

Trade Balance

-91616 -119403 -98446 -89515

Invisible net 74591 89587 70931 59185

Current Account Balance

-17034 -19817 -17516 -30330

Capital Account*

109198 9737 7136 41630

Change in Reserve

-91164 10080 10380 -11330

*Source: Reserve Bank of India Report

For example…Trade balance

• Debit: Sun Microsystems buys LCDs from Hong Kong.

• Credit: Singapore Airlines buys Boeing jet.

Trade in services

• Debit: American rents an apartment in Singapore.

• Credit: TUI - Germany places an ad in the NYT.

Income payments

• Debit: Honda US pays dividend to Honda Japan.

• Credit: Bank Austria pays salary to rep in NY offi ce.

Unilateral Current Transactions

• Debit: Peace Corps pays US volunteer teachers in Bosnia.

• Credit: TotalFina pays tuition of employee for Stern MBA.

BOP SURPLUS AND DEFICIT

What is BOP Surplus ?

What is BOP Deficit ?

MEANING OF DISEQUILIBRIUM IN BALANCE OF PAYMENTS

A country’s balance of payments is in

disequilibrium when there is no perfect

equality between the demand and supply for

foreign exchange.

CAUSES OF DISEQUILIBRIUM IN BALANCE OF PAYMENTS

• Temporary causes

• National Income

• Inflation

• Economic Development

• Borrowing and Lending

• Change in exchange rate

• Political factors-like instable govt.

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• TEMPORARY CAUSES- Temporary causes may

arises due to variations in the trade, effect of

weather on agriculture production etc.

• NATIONAL INCOME - Another cause is the

change in country’s national income. If the

national income of a country increases, it will

lead to an increase in imports thereby

creating a deficit in balance of payments.

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• INFLATION- Inflation is another cause of

disequilibrium in the balance of payment. If

there is inflation in the country prices of

exports increase, thus increase in export

prices leading to decline in exports and rise in

imports result in adverse.

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• ECONOMIC DEVELOPMENT- A country’s

balance of payments also depends on its

stage of economic development. If a country

is developing it will have a deficit in its

balance of payments.

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• BORROWING AND LENDING- A country which

gives loans and grants on a large scale to

other countries has a deficit in its balance of

payments on capital account. On the other

hand, a developing country borrowing large

funds from other countries may have a

favourable balance of payments.

Continue….• CHANGE IN EXCHANGE RATE– This change arise

due to change in exports and imports. If exports

of the country are more then imports the

demand for its currency increase so that the

rate of exchange moves in favours. On the

other hand if imports are more than exports the

demand for the foreign currency increase and

the rate of exchange will against the country.

Continue…• Political factors like instable govt.

Lack of export substitution

More imports

MEASURES OF DISEQUILIBRIUM IN BALANCE

OF PAYMENTS

MONETARY MEASURES

• Deflation• Exchange depreciation• Devaluation• Exchange control

NON-MONETARY MEASURES

• Tariffs• Quotas• Export promotion

measures• Import substitution

Cyclical disequilibrium

Structural disequilibrium

Short run disequilibrium

Long run disequilibrium

Monetary disequilibrium

Exchange rate fluctuation

disequilibrium

TYPES OF DISEQUILIBRIUM

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