INTERNATIONAL TRADE & BUSINESS Under guidance- PRESENTED BY_
BALANCE OF TRADE The difference between a countrys importsand its exports. Balance of trade is the largestcomponent of a countrys balance of payments.Debit items include imports, foreign aid, domesticspending abroad and domestic investmentsabroad. Credit items include exports, foreignspending in the domestic economy and foreigninvestments in the domestic economy. A countryhas a trade deficit if it imports more than itexports; the opposite scenario is a trade surplus.Also referred to as "trade balance" or"international trade balance."
CONTENTSMeaningObjectiveCharacteristicsStructureComponentsBalance 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 ofinternationaltransactions betweenresidents of onecountry and the restof the world”
OBJECTIVE Its main objective is to represent theeconomic position of a country, whetherits currency is rising or falling in itsexternal 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
Continue….and credits (+) on the right side of statement .But in the balance of payments accounting,debits are shown on the right side and creditson the left side of the statement. For example:When a payment is received from a foreigncountry, it is a credit transaction while paymentto a foreign country is a debit transaction.
COMPONENTS OF BALANCE OF PAYMENTSCURRENT ACCOUNT • The current • The capital CAPITAL ACCOUNT account of a account of a country consists country consist of of all transactions its transaction in related to trade in financial assets in goods and the form of short- services and term and long- unilateral term lending and transfers. borrowing.
Table. Balance of payments accountCredits(+) (Receipts) CURRENT ACCOUNT Debits(-)Payments EXPORTS IMPORTS• Goods •Goods• Services •Services• Transfer payments •Transfer payments CAPITAL ACCOUNTBorrowings from Foreign countries Lending to foreign countriesinvestments by foreign countries Direct investments by foreign countries OFFICIAL SETTLEMENTS ACCOUNT Increase in Official Reserve of Gold andIncrease in Foreign Official Holdings Foreign Currencies ERRORS AND OMISSIONS
Major items of India’s balance of payments (us$ million) 1007-08(PR) 1008-09(P) April-Dec(1008- April-Dec(1009- 09)(PR) 1010)(P)Export 166163 175184 150510 114473Import 157789 194587 148967 113988Trade Balance -91616 -119403 -98446 -89515Invisible net 74591 89587 70931 59185Current Account -17034 -19817 -17516 -30330 BalanceCapital Account* 109198 9737 7136 41630Change in -91164 10080 10380 -11330 Reserve *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 office.Unilateral Current Transactions •Debit: Peace Corps pays US volunteer teachers in Bosnia. •Credit: TotalFina pays tuition of employee for Stern MBA.
BOP SURPLUS AND DEFICITWhat 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.
Continue…• 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.
Continue….• 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.
Continue….• 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.
Continue…• 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 substitutionMore imports
MEASURES OF DISEQUILIBRIUM IN BALANCE OF PAYMENTS • Deflation MONETARY • Exchange depreciation MEASURES • Devaluation • Exchange control • Tariffs NON- • Quotas MONETARY • Export promotion measures MEASURES • Import substitution
TYPES OF DISEQUILIBRIUM Cyclical disequilibrium Structural disequilibrium Short run disequilibrium Long run disequilibrium Monetary disequilibrium Exchange rate fluctuation disequilibrium