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Balance of trade & balance of payment

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Balance of trade & balance of payment

  1. 1. Balance Of Trade: Introduction: Balance: A state of equilibrium or equal distribution of weight ,amount etc. Trade: The act or process of buying ,selling or exchange commodities at either wholesale within country or between countries . Also called domestic trade or foreign trade.
  2. 2. Types of Trade: Domestic trade: Wholesale: The sale of good in large quantities. Retail: The sales of good to ultimate consumers usually in small Quantities.
  3. 3. International trade: Export: Send goods to another country for sale. Imports: To bring a product into a country for trade or sale. Enterpot trade: Trade in which imported goods are re-exported with or without any additional processing or repackaging
  4. 4. ADVANTAGES AND CHALLENGES TO EXPORTS ADVANTAGES CHALLENGES • EARNING MORE MONEY • INCREASED SALES AND PROFITS • UN WASTAGE OF THINGS • GAIN GLOBAL SHARES • LOWER PER UNIT COSTS • HIGH TRANSPORTATION FEES • ENTERING AN EXPORT AND BUSINESS REQUIRES CAREFUL PLANNING • MARKET INFORMATION • FINANCIAL RISK • SECURITY REASONS
  5. 5. ADVANTAGES AND CHALLENGES OF IMPORTS ADVANTAGES • LOWER PRICE RATE • HIGH QUALITY • CONSUMER BENEFITS CHALLENGES • NEEDS FUNDS TO IMPORTING • RISK TO SALE • TRANSPORT COSTS
  6. 6. Balance of Trade: It is the comparison between value of export and imports of the physical items (goods , not services) of a country in a given period of time usually a year.
  7. 7. A country has to deal with other countries in respect of 3 items:- Visible items: which include all types of physical goods exported and imported. Invisible items: which include all those services whose export and import are not visible. e.g. transport services, medical services etc. Capital transfers: which are concerned with capital receipts and capital payment.
  8. 8. TYPES OF BALANCE OF TRADE: •FAVOURABLE / SURPLUS BALANCE. •UNFAVOURABLE /ADVERSE BALANCE.
  9. 9. Favourable Balance: When the value of the export of the country is greater than imports of the country then balance of trade is said is said to be favorable. (Exports>Imports) Unfavourable Balance: When the value of the exports of the country is less than imports of the country then balance of trade it said to be unfavorable. (Exports<imports)
  10. 10. Causes of unfavorable balance of trade High Imports Low Production High Population Low Quality of Goods Imports of Consumer Goods Currency Value Increase in oil Prices
  11. 11. Remedies for Improving BOT Explore Market Special Scheme Reduce use of oil Reduce Imports More trade Agreement Export promotion
  12. 12. Balance of payment: It is the record of all economic transaction between the resident of the country and rest of the world in particular period of a year or more commonly over a year.
  13. 13. Types of balance of payment • FAVOURABLE / SURPLUS BALAN • UNFAVOURABLECE /ADVERSE BALANCE
  14. 14. Favourable Balance: If total receipts are more than total payments ,the BOP is said to be favorable (Receipts>Payments) Unfavourable Balance: If total receipts are less than total payments,the BOP is said to be unfavorable. (Receipts<Payments)
  15. 15. Balance of payment = Balance of visible items +balance of invisible items Components of BOP The three major components of balance of payment are as follows: 1.Current Account 2.Capital Account 3.Balancing Item
  16. 16. Components of BOP 1. Current Account  It refers to an account which records all the transactions relating to export and import of goods and services and unilateral transfer  It contains the receipts and payments relating to all the transactions of visible items, invisible items and unilateral transfers  It shows the net income generated in the foreign sector
  17. 17. Components of BOP Components of Current Account  Export and Import of Goods (Merchandise Transactions or Visible Trade)  Export and Import of Services (Invisible Trade)  Unilateral or Unrequited Transfers to and from abroad (One sided Transactions)  Income receipts and payments to and from abroad
  18. 18. Components of BOP 2. Capital Account  It records all those transactions, between the residents of a country and the rest of the world, which cause a change in the assets or liabilities of the residents of the country or its government  Capital Account is used to:  It is related to claims and liabilities of financial nature a. Finance deficit in current account; or b. Absorb surplus of current account.
  19. 19. Components of BOP Components of Capital Account:  Borrowings and landings to and from abroad  Investments to and from abroad  Change in Foreign Exchange Reserves
  20. 20. Components of BOP 3. Balancing Item  It is simply an amount that accounts for any statistical errors and assures that the current and capital accounts sum to zero  By the principles of double entry accounting, an entry in the current account gives rise to an entry in the capital account, and in aggregate the two accounts automatically balance
  21. 21. Components of BOP  It may be positive or negative  A balance isn't always reflected in reported figures for the current and capital accounts, which might, for example, report a surplus for both accounts Components of Balancing Item
  22. 22. Causes of Unfavorable Balance of Payment Addition in Imports Slow growth in production Less Exports Affect of Inflation Restriction on developing countries Defense Spending
  23. 23. Remedies of improving BOP Export Promotion Special schemes Explore MarketEnhance Production Optimum Industries Reduce Imports
  24. 24. BOPvs. BOT BOP BOT 1. It is a narrow term. 2. It includes only visible items. 3. It can be favorable or unfavorable. 4. BOT = Net Earnings on Exports- Net Payment for imports 1. It is a broad term. 2. It includes all transactions related to visible, invisible and capital transfers. 3. It is always balances itself. 4. BOP = Current Account + Capital Account + or - Balancing item ( Errors and omissions)
  25. 25. BOPvs. BOT BOP BOT
  26. 26. Disequilibrium
  27. 27. Causes • Economic factors Imbalance between export & Import New Source of supply & new substitutes High Domestic Price • Political factors Instability & Disturbance cause large capital outflow • Social factors
  28. 28. Conclusion It is concluded that; balance of trade is the exchange of physical/visible items whether balance of payment is the exchange of both visible and non-visible items . In a country if, there is favorable balance of payment and trade then the country can progress and can compete with other developed countries in the world.
  29. 29. Thank you !

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