What It Means A country's balance of payments tells you whether it saves enough to pay for its. This is called capital export. An increase in exports causes the national income to rise by many times through the operation of the foreign trade multiplier. In such a situation, we are to restrict our imports and our resources must be diverted into another export line product. In the opposite case, it is unfavourable. When the value of currency is higher in relation to other currencies, it is said to be overvalued.
A country with a large trade deficit is not as likely to import as much as a country with a trade surplus. By all economic transactions we mean transactions of both visible goods merchandise and invisible goods services , assets, gifts, etc. It will be balanced only when the total of credit items will exactly be equal to the total of debit items which really happens. On the contrary, if total credits are more than total debits in the current and capital accounts, including errors and omissions, the net debit balance measures the surplus in the balance of payments of a country. If there is inflation in the country, prices of exports increase.
When tariffs are imposed, the prices of imports would increase to the extent of tariff. There is also outflow of capital. It means, the foreigners can buy more goods than before with the same amount of currency which no doubt, stimulates exports and check imports. When a country devalues its currency, the price of foreign currency increases which makes imports dearer and exports cheaper. It has enough excess savings to lend to countries that buy its products.
As such, there must be either a deficit or a surplus in the current account. The basic balance places short-term private non-liquid capital movements below the line while the net liquid balance puts them above the line. It refers to all financial transactions. The reason being that a current account deficit is the same thing as a capital account surplus. Thus, if we find any trade deficit, it does not mean that the country is losing its reserves foreign exchange etc. The country has to pay more for costly imports and gets less for its cheap exports.
These may lead to increased production, employment and income in the country. These include all items referred to under 2 In the above para. Naturally, the reasons for creating such a situation must be removed. Exports may be also encouraged by granting bounties to exporters and to manufacturers also. For instance the government may allow free entry of capital goods, but impose heavy import duties on luxuries. If foreign ownership increases more than domestic ownership does, it creates a deficit in the financial account.
They are positive items or credits because these are receipts from foreigners. When a payment is received from a foreign country, it is a credit transaction while payment to a foreign country is a debit transaction. To know the influence of foreign trade on national income of the country. The reasons for the cause of disequilibrium in the balance of payments are noted below: a Domestic Inflation The greater bulk of balance of payments difficulties are the result of domestic inflation and the same can be corrected by disinflation i. There can be either surplus or deficit in current account. Meaning of Balance of Payments 2.
To correct it expenditure and income should be brought into equality. This is the largest component of the current account, which is itself the largest component of the balance of payments. If a country is developing, it will have a deficit in its balance of payments because it imports raw materials, machinery, capital equipment, and services associated with the development process and exports primary products. Thus, in order to correct the adverse balance of payments no single method is found suitable. We know that the exports and imports of a country are influenced by a number of factors. But it is difficult to determine which item is compensatory and which is autonomous. We study these as follows: 1.
What is Balance of Payments? A trade deficit can then occur even if all the imports are being sold by, and sending profit to, a domestic firm. Items 2 a and 2 b comprise services balance or balance of invisible trade. In other words, capital account records export and import of capital from and to foreign countries. If the domestic interest rate is higher than the world rate, there will be capital inflows and the balance of payments deficit is corrected. A short term capital is one which matures in one year or less, such as bank accounts. Items that are placed below the line are called settlement or accommodating or compensatory or induced items. Structure of Balance of Payments Accounts The balance of payments account of a country is constructed on the principle of double-entry bookkeeping.