Lecture # 5
BALANCE OF TRADE
xThe balance of trade is the difference between the monetary value of exports and
imports in an economy over a certain period of time.
xA positive balance of trade is known as a trade surplus and consists of exporting
more than is imported;
xA negative balance of trade is known as a trade deficit or, informally, a trade gap.
Physical balance of trade
xMonetary balance of trade is different from physical balance of trade (which is
expressed in amount of raw materials). Developed countries usually import a lot of
primary raw materials from developing countries at low prices.
xOften, these materials are then converted into finished products, and a significant
amount of value is added
Factors that can affect BOT
1. Exchange rates
2. Trade agreements or barriers
3. Other tax, tariff and trade measures
4. Business cycle at home or abroad.
Balance of Payment
xThe Balance of Payments (or BOP) measures the payments that flow between any
individual country and all other countries. It is used to summarize all international
economic transactions for that country during a specific time period, usually a year.
xThe BOP is determined by the country's exports and imports of goods, services, and
financial capital, as well as financial transfers. It reflects all payments and liabilities
to foreigners (debits) and all payments and obligations received from foreigners
(credits).
Current Account
xThe current account is the sum of net sales from trade in goods and services, net
factor income (such as interest payments from abroad), and net unilateral transfers
from abroad.
xPositive net sales to abroad correspond to a current account surplus; a negative net
sale to abroad correspond to a current account deficit.
Capital account (or financial account)
xThe financial account is the net change in foreign ownership of domestic assets. If
foreign ownership of domestic assets has increased more quickly than domestic
ownership of foreign assets in a given year, then the domestic country has a
financial account surplus.
xThe financial account is the net change in foreign ownership of domestic assets. If
foreign ownership of domestic assets has increased more quickly than domestic
ownership of foreign assets in a given year, then the domestic country has a
financial account surplus.
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