BALANCE OF

PAYMENT
and
BALANCE OF
TRADE

Balance of Payment (BOP)

A nations balance of payments statement records all financial

transactions between its resident and those of the rest of the world
during a given period of time, usually one year because the balance of
payments record is maintained in a double-entry bookkeeping system
and it must be always balance. As on an individuals financial statement,
the assets and liabilities or the credit and debits must offset each other.

A balance of payments is a record of condition, not a determinant of

condition. Each of the nations financial transactions with other countries
is reflected in its balance of payments.

A nations balance of payments presents an overall view of its

international economic position and is an important economic measure
used by treasuries, central banks, and other government agencies
whose responsibility is to maintain external and internal economic
stability.

A balance of payments represents the difference between receipts from

foreign countries on one side and payments to them on the other.

Balance of Payment (BOP)

When countries trade, financial transactions
among businesses or consumers of
different nations occur:
Products and services are exported and Imported
Monetary Gifts are exchanged
Investment are made
Cash payments are made
Cash receipts are received
Vacation and Foreign Travel occurs

A balance of payments
statement includes three
accounts:
1. Current Account
A record of all merchandise exports, imports and services plus
unilateral transfer of funds.
The current account is used to mark the inflow and outflow of
goods and services into a country. Earnings on investments,
both public and private, are also put into the current account.
2. Capital Account
A record of direct investment, portfolio investment, and short
term capital movements to and from countries.
3. Official Reserves Account
A record of exports and imports of gold, increases or decreases
in foreign exchange, and increase or decrease in liabilities to
foreign central banks.

Balance of Trade (BOT)

The relationship between merchandise import and
exports is referred to as the balance of
merchandise trade or trade balance. If a country
exports more goods than it imports, it has a
favorable balance of trade.
Usually a country that has a negative balance of
trade also has a negative balance of payments.
Factor such as these eventually require
adjustments in the balance of payments through
changes in exchange rates, prices, and/or
incomes.

Protectionism
International business must face the reality
that this is a world of tariffs, quotas, and
nontariff barrier designed to protect a countrys
markets from intrusion by foreign companies.

Arguments for Protection

PROTECTING AN INFANT (SUNRISE) INDUSTRY
Many governments argue that an industry that is just
developing may not have the economies of scale advantages
that larger industries in other countries may enjoy.
TO AVOID THE RISKS OF OVER- SPECIALIZATION
Governments may want to limit over- specialization, if it
means the country could become over-dependent on the export
sales of one or two products.
The introduction of new products or changes in the patterns
of demand and supply can have serious effects on the
economies of developing countries which tend to over
specialize in the production of primary products without choice.

Arguments for Protection

STRATEGIC REASONS
It is sometimes argued that certain industries need to be
protected in case they are needed at times of war.
TO PREVENT DUMPING
What is dumping?
Dumping is the selling by a country of large quantities of
a commodity, at a price lower than its production cost, in
another country.
Where countries can prove that their industries have
been severely damaged by dumping, their governments are
allowed under international trade rules to impose antidumping measures to reduce the damage.

Arguments for Protection

PROTECTING DOMESTIC EMPLOYMENT
At any given time in an economy, there will be some industries
that are in decline (sunset industries) because they cannot
compete with foreign competition.
PROTECTING THE ECONOMY FROM LOW-COST LABOUR
It is often argued that the main reason for declining domestic
industries is the low cost of labor in exporting countries.
The resource conservation argument becomes increasingly
valid I an era of environmental consciousness and worldwide
shortages of raw materials and agricultural commodities.

Imports are an
essential ingredients of
a countrys export
competitiveness.
Around 40% of the value
of exported good is in
fact imported inputs
Trade is no longer
about finished products
or services, It is about

adding value

by
contributing to a stage I
the production of
finished product or by
providing services.

Pascal Lamy

Trade Barriers
To encourage development of
domestic industry and protect
existing industry, governments
may establish such barriers and
market barriers. Barriers are the
imposed against foreign business.
While the inspiration for such
barriers may be economic or
political, they are encouraged by
local industry. Whether or not the
barriers are economically logical,
the fact.

 Tariff
A tariff, is a tax returns imposed by a government on goods
entering at its borders. Tariffs may be used as a revenuegenerating tax or to discourage the important of goods or for
both reasons.

Quotas
Quota is a specific unit or dollar limit applied to a particular
type of good.
Quotas put an absolute restriction the quantity of a specific
item that can be imported.

Voluntary Export Restraints

Similar to quotas are the voluntary export restraints. (VER)

Boycott
Government boycott is an absolute
restriction against the purchase and
then importation of certain goods
from other countries. A public boycott
can be either formal or informal and
may be government sponsored or
sponsored by an industry.

Monetary Barriers
A government can effectively regulate its internal
trade position by various forms of exchange
control restriction. A government may enact such
restrictions to preserve its balance-of-payments
position or specifically for the advantage or
encouragement of particular industries.

Three barriers to consider:

1. Blocked currency
- Is used as a political weapon or
as a response to difficult balance
of payments situation. Blockage
is accomplished by refusing to
allow importers to exchange
national currency for the sellers
currency.
2. Differential Exchange
- Rate is a particularly ingenious
method of controlling my
imports. It encourages the
importation of goods the
government deems desirable and
discourage people importation of
goods the government does not
want.

Government Approval to Secure Foreign

Exchange
- Often used by countries experiencing severe
shortage of foreign exchange.
- Importers who want to buy a foreign good must
apply for an exchange permit; that is, permission to
exchange an amount of local currency for foreign
currency.
- The exchange permit may also stipulate that the
amount to be exchanged must be deposited in a local
bank for a set period prior to the transfer of goods.
Standards
- Nontariff barriers of this category include standards
to protect health, safety and product quality. The
standards are sometimes used in an unduly stringent
or discriminating way to restrict trade, but the sheer
volume of regulations in this category is a problem in
itself.