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Balance of Payment

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5 views16 pages

Balance of Payment

Uploaded by

mohitvyas972
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Measurement of Global Trade

Two key indicators:

Balance of Trade & Balance of Payments


Basic Theory of International Trade
1. Classical Trade Theory
Adam Smith (1723-1790) and His
Absolute Advantage
David Ricardo (1772-1823) and His
Comparative Advantage
Absolute Cost Advantage

Countries should specialize in the production of


goods for which they have an absolute advantage and
then trade these goods for goods produced by other
countries.
Basic Argument:
Country should never produce goods at home that
country can buy at lower cost form other countries.
Absolute advantage – exists potential for gains in
trade
Theory of Absolute Advantage

Wheat(one
unit) Cloth(one unit)
Britain 200 days 100 days
France 100 days 200 days

Britain: ( 1 W = 2 C )
France: ( 2 W = 1 C)
Comparative Cost Advantage:

According to David Ricardo potential world


production is greater with unrestricted free
trade than it is with restricted trade.

Consumers in all countries can consume more


if there are no restrictions to trade.

Differences in labour productivity between


nations underlie the notion of comparative
advantage
Theory of Comparative Advantage

Cloth (Labor/unit) Wine(Labor/unit)


England 100 120
Portugal 90 80

England: ( 1.2 C = 1 W )
Portugal: ( 0.89 C = 1W )
Balance of Payment ( BOP )
BOP is a systematic record of all economic
transactions (goods, services , investment and
Loan) between residents of the reporting
country and with the rest of the world in a
given period of time
BOP
PURPOSE:
Measures all financial and economic
transactions over a specified period of time.
Balance of payments and international investment
position data are critical in formulating national and
international economic policy. Certain aspects of the
balance of payments data, such as payment
imbalances and foreign direct investment, are key
issues that a nation’s economic policies seek to
address.
Current Account
The current account includes all transactions
which give rise to or use up national income.
The Current account consists of two major items
–
1. Merchandise exports and imports
2. Invisible exports and imports
Capital Account
The capital account consists of short-term and
long-term capital transactions
A capital outflow represents a debit and a
capital inflow represents credit
Unilateral Transfers Account
Unilateral transfers is another terms for gifts.
These include Private
remittance ,government grants, disaster
relief ,etc.
Official settlements Accounts
Official reserves represent the holdings by the
government or official agencies of the
means of payment that are generally
accepted for the settlement of international
claims – official purchases of foreign
currencies or other service assets.
Balance of payments Disequilibrium

Causes :
Economic factors
Political factors
Social factors
Economic Factors
Development Disequilibrium
Cyclical Disequilibrium
Secular Disequilibrium – high disposable income – high demand – high
production costs – high domestic prices – result in more imports and less exports

Structural Disequilibrium – alternative sources of supply, the


development of better substitutes, the exhaustion of productive resources , the
changes in transport routes and costs.
Political and Social Factors:
• Political Instability
• Large capital outflow
• Inadequacy of domestic investment and
production
• War
• Changes in the world trade routes, etc
Social Factors:
• Taste ,preference ,fashions, etc.
Measures to Correct Disequilibrium of
Balance of Payments
Monetary Measures :
• Monetary contraction
• Devaluation
• Exchange Control
Trade Measures :
• Tariffs
• Quotas
Other measures: - Foreign loans, investment ,import substitutes,
direct control etc.

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