BALANCE OF PAYMENT

andBALANCE OF

TRADE

Balance of Payment (BOP)• A nation’s 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 individual’s 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 nation’s financial transactions with other countries is reflected in its balance of payments.

• A nation’s 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.

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

Balance of Payment (BOP)

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 country’s markets from intrusion by foreign companies.

Arguments for ProtectionPROTECTING 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 ProtectionSTRATEGIC 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 anti-dumping measures to reduce the damage.

Arguments for ProtectionPROTECTING 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 country’s 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 BarriersTo 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 revenue-generating tax or to discourage the important of goods or for both reasons.

• Quotas

• Voluntary Export Restraints

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.

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.