Foreign Exchange Management

Lecture-2: Foreign Trade

Prepared by
Tasneema Khan
Assistant Professor
Department of Banking and Insurance
University of Dhaka
 Topics of Discussion
• Foreign Trade
• Need for Foreign Trade/Reasons of Foreign
Trade
• Balance of Trade
• Composition of Export and Export
• Balance of Payment
• Components of Balance of Payment
• Correction of Balance of Payment
Disequilibrium
 Foreign Trade
Foreign Trade constitutes a sizeable portion of international
transaction of a country.

• No country in the world produces all the commodities it requires.

• A country may produce more of those commodities in the
production of which it has greater advantage.
• The commodities which a country can economically produce it
exports, while those in producing which it has greater
disadvantage it imports.

“The foreign trade of a country refers to its import and exports of

merchandise from and to other countries under contract of sale.”
“Foreign trade is the exchange of capital, goods, and services across
international borders or territories.”
 Composition of Imports and Exports
• The composition of imports and exports in an important aspect
of a country’s foreign trade.
Import:
Importing is the purchasing of goods or services made in another
country. For example, importing edible oil from China.
Export:
Exporting is selling domestic-made goods in another country. For
example, Hameem Garments exports Readymade Garments (RMG)
products to Western Countries.

• The type of goods imported and exported indicate the stage of

development of a country, standard of living and economic
activity.
• Developed vs. Developing or Underdeveloped countries.
 Need of Foreign Trade
• There is a wide difference in respect of the materials, natural
and human resources, stage of technical and scientific progress,
and possession of capital equipment in different countries.
1. Differences in natural resources:
Minerals, Soil and climate, Land and productivity of land
2. Differences in size and density of population:
Population too large and dense, Human resource
3. The stage of industrialization and technical and scientific
development:
Highly industrialized country, Industrially backward country, In
the process of industrialization
4. The high and rising standard of living of a country:
High level of consumption, living standard
 Foreign Trade in Bangladesh
The main export products are:
• Clothes,
• Raw jute and its derived products,
• Leather,
• Fish and
• Frozen seafood.

Import
Bangladesh mainly imports:
• Machinery and equipment, Capital Goods
(Machinery,
Industrial Raw
Material (Cotton,
Consumer Goods
(Electronics,
• Chemical products, Spares,
Equipments)
Chemicals,
Mineral Oil)
Drugs, Medicines,
Milk Powder)

• Steel & metals,

• Food and oil derived products (OEC).
 Foreign Trade in Bangladesh (cont.)
The country's main export partners are:
• The European Union,
• The United States and
• China.
Bangladesh imports mainly from:
• Thailand,
• India,
• China,
• Indonesia and
• Singapore
 Balance of Trade
Balance of trade is the difference between the value of a country's imports and exports for a
given period.
Balance of Trade (BoT)/Trade Balance refers to the net difference between the values of
exports and imports of commodities from/into a country.
• The movement of goods/commodities is known as “Visible Trade”

BOT = Total value of imports - Total value of exports.

1. Trade Surplus:
When the difference is in excess of export over import, the country is said to have a
“favorable”/”surplus” or “positive” balance of trade.
• A positive balance occurs when exports > imports and is referred to as a trade surplus.

2. Trade Deficit:
When imports are more than exports, the country is said to have a “unfavorable”/”deficit” or
“negative” balance of trade.
• A negative trade balance occurs when exports < imports and is referred to as a trade deficit.

3. Balanced:
When the value of exports equates that of imports. It’s a rare case. exports = imports
 Balance of Trade (Cont.)
In 2019, Germany had the largest trade surplus
followed by Japan and China while the United
States had the largest trade deficit.
 Balance of Payment
Foreign Trade
Visible Items Invisible Items
Export and Import of Goods and Export and Import of Services
Merchandises
• Capital borrowed or lent
• Interest and dividends received or paid
on foreign investment
• Tourist income and expenses
• Studying abroad
• Donation and Aid
 Balance of Payment
• Balance of Payment (BoP) is a systematic
record of all economic transactions of a
country with the rest of the world for a given
period of time, normally a year.
• It includes all visible and invisible items of
foreign trade.
• It is more comprehensive than Balance of
Trade.
Importance of Balance of Payment
• Gives information of trading position of a
country over years and among different
countries.
• Gives information on the indebtedness of a
country.
• Gives information on the foreign exchange
reserve.
 Equilibrium and Disequilibrium of BoP
BoP is said to be in equilibrium when payments and receipts
are equal.

1. Favorable/Active Balance of Payment:

The balance of payment is said to be favorable when the
country’s total receipts are in excess of the total payments.

2. Unfavorable/Passive Balance of Payment:

The balance of payment is said to be unfavorable when the
country’s total payments are in excess of the total receipt.
 Components of BOP
The BOP mainly comprises of two accounts: Current and Capital.
Current Account
The four major components of the Current account are as follows:
1. Visible trade – This is the net of export and imports of goods (visible items).The balance of this
visible trade is known as the trade balance.
2. Invisible trade – This is the net of exports and imports of services (invisible items). Transactions
mainly consist of shipping, IT, banking and insurance services.
3. Unilateral transfers to and from abroad: are one-way transfers of assets, such as worker remittances
from abroad and direct foreign aid.
4. Income receipts and payments – Income receipts include income derived from ownership of assets,
such as stock dividends and bond interest.
Capital Account
The Capital account is used to finance the deficit in the current account or absorb the surplus in the
current account. The major components of the Capital account:
1. Loans to and borrowings from abroad – These consist of all loans and borrowings given to or
received from abroad. It includes both private sector loans, as well as public sector loans.
2. Investments to/from abroad – These are investments made by nonresidents in shares in the home
country or investment in real estate in any other country.
The Financial Accounts
A country's financial account is broken further down into two sub-accounts: the domestic ownership
of foreign assets and the foreign ownership of domestic assets.
 Current Account Capital Account

The current account represents Capital account records the net

a country's net income over a change of assets and liabilities
period of time. during a particular year.

The current account deals with The capital account reflects

the receipt and payment in sources and utilization of
cash as well as non-capital capital.
items.
• The current account balance was $108 million in the negative in July last year,
but it jumped to $1.965 billion in the positive in the same month this year.
• A surplus in current account resulted in overall surplus in BoP balance. This
contributed to an increase in official foreign exchange reserves.
• FX reserve stood at $37.288 billion in July, enough to meet the country's
imports of goods and services for seven months.
• A current account surplus implies an excess of savings over investments.
 Disequilibrium
A consistent surplus
A consistent deficit
 Correction of Balance of Payment
Disequilibrium
• Import restriction
• Export Promotion
• Devaluation/Depreciation
• Deflation
• Fiscal Measures
• Exchange Control
Thanks