Chapter 6 International Trade Prepared BY Kokab Manzoor

Chapter # 6 International Trade Prepared BY Kokab Manzoor

Course Outline: • Concept to International Trade • Export and Import • Balance of Trade (BOT) • Favorable and Unfavorable Balance of trade • Concept to Balance of Payment • Favorable, unfavorable balance of payments. • Causes of Adverse BOP • Measures to remove deficit in BOP.

International Trade International trade is the exchange of goods and services across international boundaries or territories. International trade is the act of export and import or transaction of goods and services between different countries of the world.

Exports: Exports refers to those goods and services which are sold by one country to another country. Imports: Imports refers to those goods and services which are purchased by one country from another country.

Balance of Trade: Balance of Trade is the difference between the values of exports and imports of physical items of a country during a given period of time. BOT = (X – M) • If export are greater than the imports i. e. X>M, The Balance of Trade (BOT) is favourable. • If exports are equal to imports i. e. X=M, The Balance of Trade (BOT) is Balance. • If exports are less than the import i. e. X<M, The Balance of Trade (BOT) is Unfavourable.

Balance of Payment (BOP): Balance of Payment is a record of all economic transactions of a country with the rest of the world during a period of one year. Balance of Payment of a country is a systematic record of its receipts and payments of international transactions in a given year.

Major Components of BOP Accounting system 1 2 3 • Current Accounts • Capital Accounts • Official settlements Accounts 7

Major Components of BOP Accounting system BALANCE OF PAYMENTS ACCOUNTS Credits (+) (RECEIPTS) Debits ( -) (PAYMENTS) 1. Current Account Exports of, a) Goods b) Services c) Transfer payments Imports of, a ) Goods b) Services c) Transfer payments 2. Capital Accounts Borrowing s from Foreign countries Lending to Foreign Countries Direct Investment by Foreign Countries Direct Investment in Foreign Countries 3. Official Reserve Account Increase in Foreign official holdings e. g. official purchase of foreign currency Increase in Official Reserves of Gold and Foreign Currencies

BOP Account Explanation 1) CURRENT ACCOUNT The current account of BOP consists of the receipts and payments against a) Exports and imports of goods, b) Exports and imports of services c) Transfer payments ( international grants, gifts and foreign remittances both private and public etc) 9

BOP Account Explanation (cont. . ) 2) CAPITAL ACCOUNT • Capital account consists transaction in financial assets in form of short and long term lending and borrowings, private and official investments • This account shows capital mobility internationally for short and long period of time • Receipts and payments regarding foreign loans are considered.

BOP Account Explanation (cont. . ) 3) OFFICAL RESERVE ACCOUNT • Official Reserve Account include gold stock, holding of foreign currencies • It represents the “Foreign Exchange” position of a country. • It shows the change in a nation's official reserves during one year

Causes of Adverse BOP: Following are the main causes: 1 2 3 4 5 6 Export of primary goods: Domestic inflation Unfavorable Terms of Trade(TOT) Import of capital goods Higher payments foreign services Rise in prices of oil and fertilizers

Causes of Adverse BOP: 7 Inflation in International Market 8 Consumption oriented society 9 Decline in workers foreign remittance 10 Repayment of debt and interest 11 Devaluation

Remedial Measures to correct the Adverse BOP The adverse balance of payment can be corrected with the following way: – Diversification of exports pattern – Restoration of sick industries – Reduction in export duties – Production of high quality goods – Creation of export processing zone (agencies) – Devaluation – Decrease in consumption

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