Balance of trade and balance of payments

Commerce, SS 1, Week 4

Topic: Balance of trade and balance of payments

Contents:

1. Meaning of balance of trade
2. Meaning of balance of payment
3. Components of balance of payment
4. Favorable and unfavorable balance of payments

Meaning of Balance of Trade

Balance of trade can be defined as the total value of goods sold and bought by a country during a given period, usually a year.. When visible export equals visible imports in monetary terms,we have balance of trade. A positive balance of trade means a country is exporting more than it is importing while a negative or unfavorable balance of trade occurs when a country imports is more than its export.

Meaning of Balance of payment

Balance of payments can be defined as a statement or record showing the relationship between a country’s total payment to other countries and its total receipts from them in a year.

Components of Balance of payments

1. Current Account: This is composed of receipts and payments for visible and invisible services
2. Capital Account: This is made up of the inflow and outflow of capital, it includes both long and short term.It consists of capital movement in form of investments, loans and grants.
3. Monetary Movement Account: This Account shows how the balance of both current and capital accounts are settled.

Favorable balance of payments

This occurs when the receipts from invisible and visible export trade is greater than payments to other countries on visible and invisible imports trade.

Unfavorable balance of payments

This means that payment on visible and invisible import is greater than receipts on visible and invisible exports. It can be called deficit balance of payment.

Remedy for Unfavorable balance of payment

• Control of foreign exchange transaction
• Sales of foreign investment and assets
• Devaluation of domestic currency
• Borrowing from financial institutions like IMF (International Monetary Fund)
• Establishment an promotion of import substitution industries
• Export promotion by granting tax concession to export based industries
• Imposition of tariffs will reduce importation  goods by increasing their prices

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