BALANCE OF TRADE &

BALANCE OF PAYMENT

Balance Of Trade:Introduction:Balance:A state of equilibrium or equal distribution of weight ,amount etc.

Trade:The act or process of buying ,selling or exchange commodities at either wholesale within country or between countries . Also called domestic trade or foreign trade.

Types of Trade:Domestic trade:Wholesale:The sale of good in large quantities.Retail:The sales of good to ultimate consumers usually in small Quantities.

International trade:Export: Send goods to another country for sale.Imports: To bring a product into a country for trade or sale.Enterpot trade: Trade in which imported goods are re-exported with or without any additional processing or repackaging

ADVANTAGES AND CHALLENGES TO EXPORTS

ADVANTAGES CHALLENGES

• EARNING MORE MONEY

• INCREASED SALES AND PROFITS

• UN WASTAGE OF THINGS

• GAIN GLOBAL SHARES

• LOWER PER UNIT COSTS

• HIGH TRANSPORTATION FEES

• ENTERING AN EXPORT AND BUSINESS REQUIRES CAREFUL PLANNING

• MARKET INFORMATION

• FINANCIAL RISK

• SECURITY REASONS

ADVANTAGES AND CHALLENGES OF IMPORTS

ADVANTAGES• LOWER PRICE RATE

• HIGH QUALITY

• CONSUMER BENEFITS

CHALLENGES• NEEDS FUNDS TO IMPORTING

• RISK TO SALE

• TRANSPORT COSTS

Balance of Trade: It is the comparison between value of export and imports of the physical items (goods , not services) of a country in a given period of time usually a year.

A country has to deal with other countries in respect of 3 items:-Visible items: which include all types of physical goods exported and imported.Invisible items: which include all those services whose export and import are not visible. e.g. transport services, medical services etc.Capital transfers: which are concerned with capital receipts and capital payment.

TYPES OF BALANCE OF TRADE:

•FAVOURABLE / SURPLUS BALANCE.

•UNFAVOURABLE /ADVERSE BALANCE.

Favourable Balance: When the value of the export of the country is

greater than imports of the country then balance of trade is said is said to be favorable.

(Exports>Imports)Unfavourable Balance: When the value of the exports of the country is less than imports of the country then balance of trade it said to be unfavorable. (Exports<imports)

Causes of unfavorable

balance of trade

High Imports

Low Production

High Population

Low Quality of

Goods

Imports of Consumer

Goods

Currency Value

Increase in oil Prices

Remedies for Improving

BOT

Explore Market

Special Scheme

Reduce use of

oil

Reduce Imports

More trade Agreement

Exportpromotion

Balance of payment: It is the record of all economic transaction between the resident of the country and rest of the world in particular period of a year or more commonly over a year.

Types of balance of payment

• FAVOURABLE / SURPLUS BALAN

• UNFAVOURABLECE /ADVERSE BALANCE

Favourable Balance: If total receipts are more than total payments ,the BOP is said to be favorable

(Receipts>Payments)Unfavourable Balance: If total receipts are less than total payments,the BOP is said to be unfavorable.

(Receipts<Payments)

Balance of payment = Balance of visible items +balance of invisible items

Components of BOPThe three major components of balance of payment are as follows:

1. Current Account2. Capital Account3. Balancing Item

Components of BOP

1. Current Account It refers to an account which records all the transactions relating to export and

import of goods and services and unilateral transfer It contains the receipts and payments relating to all the transactions of visible

items, invisible items and unilateral transfers It shows the net income generated in the foreign sector

Components of BOPComponents of Current Account Export and Import of Goods (Merchandise Transactions or

Visible Trade)

Export and Import of Services (Invisible Trade)

Unilateral or Unrequited Transfers to and from abroad (One

sided Transactions)

Income receipts and payments to and from abroad

Components of BOP2. Capital Account It records all those transactions, between the residents of a country and the

rest of the world, which cause a change in the assets or liabilities of the residents of the country or its government

Capital Account is used to: It is related to claims and liabilities of financial nature

a. Finance deficit in current account; or

b. Absorb surplus of current account.

Components of BOP

Components of Capital Account:

Borrowings and landings to and from abroad

Investments to and from abroad

Change in Foreign Exchange Reserves

Components of BOP

3. Balancing Item It is simply an amount that accounts for any statistical errors and

assures that the current and capital accounts sum to zero By the principles of double entry accounting, an entry in the

current account gives rise to an entry in the capital account, and in aggregate the two accounts automatically balance

Components of BOP

It may be positive or negative

A balance isn't always reflected in reported figures

for the current and capital accounts, which might, for

example, report a surplus for both accounts

Components of Balancing Item

Causes of Unfavorable Balance of Payment

Addition in Imports Slow growth

in production

Less Exports

Affect of Inflation

Restriction on developing countries

Defense Spending

Remedies of improving BOP

Export Promotion

Special schemes

Explore MarketEnhance Production

Optimum Industries

Reduce Imports

BOP vs. BOT

BOP BOT

1. It is a narrow term.2. It includes only visible items.3. It can be favorable or unfavorable.4. BOT = Net Earnings on Exports-Net

Payment for imports

1. It is a broad term.2. It includes all transactions related to

visible, invisible and capital transfers.3. It is always balances itself.4. BOP = Current Account + Capital

Account  + or - Balancing item ( Errors and omissions)

BOP vs. BOT

BOP BOT

Disequilibrium

Causes• Economic factorsImbalance between export & ImportNew Source of supply & new substitutesHigh Domestic Price

• Political factorsInstability & Disturbance cause large capital outflow

• Social factors

ConclusionIt is concluded that; balance of trade is the exchange of physical/visible items whether balance of payment is the exchange of both visible and non-visible items . In a country if, there is favorable balance of payment and trade then the country can progress and can compete with other developed countries in the world.

Thank you !