Institute of Business Administration

Jahangirnagar University

Course Code: FIN503

International Financial Management

“Assignment-02”

Submitted to:
Md. Alamgir Hossen
Associate Professor
IBA-JU

Submitted by:
Gazi Md. Ifthakhar Hossain
ID# 201803063
(Batch-19)
Slot-S2

Date of Submission: March 04, 2023.

 Balance of Payment (BoP) & Balance of Trade (BoT)

Balance of Payment (BoP):

The Balance of Payments (BOP) is a systematic record of all economic transactions between
residents of a country and the rest of the world over a given period of time, usually a year. It is
a statistical statement that summarizes all transactions between a country and the rest of the
world.

The BOP is divided into three main categories: the current account, the capital account, and
the financial account.

1. The current account records all transactions related to the import and export of goods
and services, income from investments and transfers between countries. This includes
the trade balance, net income from foreign investments, and net transfers such as
foreign aid.
2. The capital account records transactions related to the acquisition and disposal of non-
financial assets such as real estate and intellectual property rights.
3. The financial account records transactions related to the acquisition and disposal of
financial assets and liabilities, including foreign direct investment, portfolio
investment, and other investments.

The BOP is important because it provides a measure of the economic health of a country and
its relationship with the rest of the world. It is used by governments, international organizations,
investors, and businesses to monitor economic trends and to assess the risks and opportunities
of investing in a particular country. A surplus in the BOP can indicate that a country is a net
creditor to the rest of the world, while a deficit may suggest the opposite.

Here is an example of how the balance of payments might be calculated:

Let's say Country A exports $100 million worth of goods to Country B, while importing $75
million worth of goods from Country B during a specific year. Additionally, Country A
receives $50 million in foreign aid from Country C, and its citizens send $25 million in
remittances back to Country A from abroad.

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On the other hand, Country A invests $30 million in a manufacturing plant in Country D, and
it borrows $40 million from Country E to finance infrastructure projects.

Based on this information, we can calculate the balance of payments for Country A as follows:

𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝒂𝒄𝒄𝒐𝒖𝒏𝒕 𝒃𝒂𝒍𝒂𝒏𝒄𝒆 = (𝐸𝑥𝑝𝑜𝑟𝑡𝑠 − 𝐼𝑚𝑝𝑜𝑟𝑡𝑠) + (𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝑎𝑖𝑑 + 𝑅𝑒𝑚𝑖𝑡𝑡𝑎𝑛𝑐𝑒𝑠)

= ($100 million - $75 million) + ($50 million + $25 million)
= $100 million
𝑪𝒂𝒑𝒊𝒕𝒂𝒍 𝒂𝒄𝒄𝒐𝒖𝒏𝒕 𝒃𝒂𝒍𝒂𝒏𝒄𝒆 = (𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝐴𝑏𝑟𝑜𝑎𝑑) + (𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝐵𝑜𝑟𝑟𝑜𝑤𝑖𝑛𝑔)
= $30 million + $40 million
= $70 million
𝑭𝒊𝒏𝒂𝒏𝒄𝒊𝒂𝒍 𝒂𝒄𝒄𝒐𝒖𝒏𝒕 𝒃𝒂𝒍𝒂𝒏𝒄𝒆 = − (𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑐𝑐𝑜𝑢𝑛𝑡 𝑏𝑎𝑙𝑎𝑛𝑐𝑒 + 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑎𝑐𝑐𝑜𝑢𝑛𝑡 𝑏𝑎𝑙𝑎𝑛𝑐𝑒)
= − ($100 million + $70 million)
= − $170 million

In this example, Country A has a surplus in its current account, meaning it is exporting more
goods and services than it is importing. However, it has a deficit in its financial account,
meaning it is borrowing more from other countries than it is investing abroad. Overall, the
country has a net outflow of funds, as the financial account deficit exceeds the current account
surplus.

Balance of Payment Position of Bangladesh

According to the Bangladesh Bank, the central bank of Bangladesh, the country's current
account balance posted a surplus of $6.10 billion in the 2020-2021 fiscal year, which is the
highest in Bangladesh's history.

The surplus was driven by a sharp rise in remittances from Bangladeshis working abroad,
which reached a record $24.77 billion, up 36.2% from the previous fiscal year. This increase
in remittances helped to offset a decline in export earnings due to the COVID-19 pandemic.

However, Bangladesh's capital account, which records the flow of investment into and out of
the country, posted a deficit of $2.87 billion in the same fiscal year. This was mainly due to a
decline in foreign direct investment (FDI) inflows as global investors became cautious due to
the pandemic.

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Overall, Bangladesh's balance of payments position in the 2020-2021 fiscal year was relatively
strong, thanks to the increase in remittances. However, the country's capital account deficit
highlights the need for policies to attract more FDI inflows to support long-term economic
growth.

Balance of Trade (BoT):

Balance of trade (BoT) refers to the difference between the value of a country's exports and the
value of its imports over a given period of time, typically a year. It is also known as the trade
balance or net exports.

When a country exports more goods and services than it imports, it has a positive balance of
trade, or a trade surplus. This means that the country is earning more money from its exports
than it is spending on its imports, which can be beneficial for its economy.

On the other hand, when a country imports more goods and services than it exports, it has a
negative balance of trade, or a trade deficit. This means that the country is spending more
money on its imports than it is earning from its exports, which can be detrimental to its
economy.

The balance of trade is an important indicator of a country's economic health and its
competitiveness in international trade. It can be influenced by factors such as exchange rates,
trade policies, and the level of domestic and foreign demand for goods and services.

For example, let's say that Country A exported goods worth $100 billion and imported goods
worth $80 billion in a given year. The balance of trade for Country A would be:

𝑩𝑶𝑻 = 𝑡𝑜𝑡𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑥𝑝𝑜𝑟𝑡𝑠 − 𝑡𝑜𝑡𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑖𝑚𝑝𝑜𝑟𝑡𝑠

= $100 billion - $80 billion
= $20 billion

In this example, Country A has a positive balance of trade of $20 billion, which means that it
exported more than it imported. However, it's important to note that the balance of trade is just
one measure of a country's economic performance and is not necessarily a good indicator of its

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overall economic health. Other factors, such as foreign investment, capital flows, and
government policies, can also impact a country's economic performance.

Balance of Trade Position of Bangladesh

According to the latest available data from the Bangladesh Bank, the BOT position of
Bangladesh for the 2020-2021 fiscal year (July 2020 to June 2021) was negative, with a trade
deficit of USD 13.83 billion. This was a decrease from the previous fiscal year's trade deficit
of USD 14.03 billion.

During the 2020-2021 fiscal year, Bangladesh's total export earnings were USD 33.67 billion,
while its total import payments were USD 47.50 billion. This resulted in a negative trade
balance of USD 13.83 billion.

The COVID-19 pandemic had a significant impact on Bangladesh's economy in the 2020-2021
fiscal year, leading to a decline in export earnings due to decreased demand and disruptions in
supply chains. The country's main export items include readymade garments, knitwear,
agricultural products, and leather goods.

Overall, the BOT position of Bangladesh in the 2020-2021 fiscal year remained negative,
indicating that the country was importing more than it was exporting.

Difference Between Balance of Payment (BoP) & Balance of Trade (BoT):

The balance of payment and balance of trade are two related but distinct economic concepts.

The balance of trade refers to the difference between a country's exports and imports of goods
and services over a given period, usually a year. It is also known as the trade balance. If a
country exports more goods and services than it imports, it has a positive trade balance or a
trade surplus. If a country imports more goods and services than it exports, it has a negative
trade balance or a trade deficit.

On the other hand, the balance of payment is a broader concept that includes not only the
balance of trade, but also all other transactions between a country and the rest of the world over

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a given period, usually a year. These transactions can include the exchange of financial assets
such as stocks and bonds, international aid and grants, and remittances from overseas workers.

The balance of payment is divided into two main accounts: the current account and the capital
account. The current account includes the balance of trade, as well as other current transactions
such as income from foreign investments and transfers between countries. The capital account
includes capital transfers such as the acquisition or disposal of non-produced, non-financial
assets, and the acquisition or disposal of financial assets and liabilities.

In summary, while the balance of trade only refers to the trade in goods and services, the
balance of payment is a more comprehensive measure that includes all transactions between a
country and the rest of the world.

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