Page 142 - DECO503_INTERNATIONAL_TRADE_AND_FINANCE_ENGLISH

International Trade and Finance

Notes exchange, and they are recorded as debit items.
• The sixth and final BOP account is the International Liquidity Account which simply records net
changes in foreign reserves. Essentially this account lists internationally acceptable means of
settling international obligations.
• Balance of trade may be defined as the difference between the value of goods and services sold
to foreigners by the residents and firms of the home country and the value of goods and services
purchased by them from foreigners. In other words, the difference between the value of goods
and services exported and imported by a country is the measure of balance of trade. If the two
sums (1) value of exports of goods and services, and (2) value of imports of goods and services
are exactly equal to each other, we say that there is balance of trade equilibrium or balance; if
the former exceeds the latter, we say that there is balance of trade surplus; and if the latter
exceeds the former, then we describe the situation as one of balance of trade deficit. Surplus is
regarded as favourable and deficit as unfavourable. In Table 3, there is a balance of trade deficit
equal to $130 million.
• For a long time, economists had assumed that factors of production do not move across
international boundaries; the classical economists built models of trade assuming that only
goods and services move across international boundaries. International capital movements
viewed in that light, were an impossibility.
• This is a sum of balance on Current Account and on Capital Account put together. It includes
all international monetary transactions of the reporting country vis-a-vis the rest of the world. It
is highly aggregative, and like any other highly aggregated variables, the concept (or the sums
entered as credit and debit under this item) cannot be of much significance.
• A distinction is made between the autonomous and the accommodating or above the Line and
below the Line transactions in the BOP. The distinction is useful to define the concepts of ‘deficit’
and ‘surplus’ in the BOP.
• Autonomous or above the Line transactions are those that “take place regardless of the size of
other items in the balance of payments”. Take, for example, the export of goods to a foreign
buyer. It is an ‘initiating’ or an ‘autonomous’ transaction and its value results in payments by
foreigners to the home country, which is entered as a credit item.
• The distinction between the ‘autonomous’ and ‘accommodating’ transactions looks very clear
cut from what has been said above. But the distinction may sometimes be not all that cut and
dry. For instance, if Malaysia exports $500 million worth of rubber, we take it as an ‘autonomous’
export transaction and treat it as now having been caused by the country’s BOP situation.
11.6 Key-Words

1. Balance of Payment : A record of all transactions made between one particular country and all
other countries during a specified period of time. BOP compares the dollar
difference of the amount of exports and imports, including all financial
exports and imports. A negative balance of payments means that more
money is flowing out of the country than coming in, and vice versa.
2. Unilateral transfer : An economic transactions between residents of two nations over a
stipulated period of time, usually a calendar year. Typically, these
transactions consist of gift exchanges, pension payments and the like,
but they can encompass other goods and services as well.
11.7 Review Questions

1. What is the balance of payment? Discuss.
2. Discuss the components of Balance of payments .
3. Distinguish between long- term and short -term account.
4. Explain the meaning of balance of trade.

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