BALANCE OF TRADE

The balance of trade calculates the difference between the value of a nation's imports and
exports of commodities and services over a given time frame . The balance of trade (BOT) is
the difference between a country's imports and exports for a specific period. The main part of
a nation's balance of payments (BOP) is its trade balance.

The balance of trade comprises two primary components:

Exports: Goods and services produced domestically and sold to foreign markets.

Imports: Goods and services purchased from foreign sources for domestic consumption.

CASE STUDY

BALANCE OF PAYMENTS

Balance of Payments is the systematic record of all economic transactions between the
residents of one country and the residents of the rest of the world in an accounting year.

• There are three components of BOP:

CURRENT ACCOUNT:. All transactions resulting from trade in products and services
currently being produced, from income one country accrues to capital and invests in another,
and from unilateral transfers, both private and official, are included in the BOP's current
account.

CAPITAL ACCOUNT: All foreign capital transfers are noted in the capital account. This
pertains to the procurement or divestment of non-monetary assets, such as land and non-
produced assets, which are necessary for production but have not been generated, like a mine
utilized for diamond extraction.
ACCOUNT OF BALANCING: International monetary flows associated with investments
in stocks, bonds, real estate, and companies are recorded in the financial account.

SCOPE OF BALANCE OF PAYMENT

The balance of payments (BOP) is the method countries use to monitor all international
monetary transactions at a specific period. If a country has received money, this is known as
a credit, and if a country has paid or given money, the transaction is counted as a debit.
Theoretically, the BOP should be zero, meaning that assets (credits) and liabilities (debits)
should balance

• Implications of an Unbalance in the BOP:

Although a nation’s BOP always balances in the accounting sense, it need not balance
in an economic sense.
An imbalance in the BOP account has the following implications:
In the case of a deficit:
(i) Foreign exchange or foreign currency reserves decline,
(ii) Volume of international debt and its servicing mount up, and
(iii) The exchange rate experiences a downward pressure. It is, therefore,
necessary to correct these imbalances.

VARIOUS FACTORS THAT CAUSE DISEQUILIBRIUM

Development Schemes: The main reason for the adverse balance of payments in developing
countries is the huge investment in development schemes.
Price-Cost Structure: Changes in the price-cost structure of export industries affect the
volume of exports and create disequilibrium in the balance of payments.
Fall in Export Demand: There has been a considerable decline in (the export demand for the
primary goods of the underdeveloped countries due to the large increase in the domestic
production of foodstuffs, raw materials, and substitutes in the rich countries.
International Borrowing and Lending: International borrowing and lending is another
reason for the disequilibrium in the balance of payments. The borrowing country tends to
have unfavorable payments, while the lending country tends to have a favorable balance of
payments.
Now, we can summarise the BOP data:
Current account balance + Capital account balance + Reserve balance = Balance of
Payments (X – M) + (CI – CO) + FOREX = BOP
X is exported,
M is imported,
CI is capital inflows,
 CO is capital outflow,
FOREX is foreign exchange reserve balance

CASE STUDY .