BOP

J.K.OKE

BALANCE OF TRADE:
BALANCE OF TRADE: IT REFERS TO THE TOTAL VALUE OF A COUNTRYS IMPORTS AND EXPORTS OF TANGIBLE GOODS /COMMODITIES / PRODUCTS BOT IS THE DIFFERENCE BETWEEN THE VALUE OF GOODS THAT A COUNTRY EXPORTS AND THE VALUE OF GOODS THAT IT IMPORTS PER ANNUM THE BOP CONCEPT IS A NARROW ONE AS IT DEALS WITH ONLY TRANSACTIONS OF GOODS AND EXCLUDES CAPITAL TRANSACTIONS, PAYMENTS FOR SERVICE & GOLD SHIPMENTS

 WHEN A COUNTRY EXPORTS MORE GOODS THAN IT IMPORTS, THERE IS EXPORT SURPLUS AND ITS BOT IS SURPLUS / FAVOURABLE. ON THE OTHER HAND, WHEN A COUNTRY EXPORTS LESS AND IMPORTS MORE GOODS, THERE IS A TRADE DEFICIT OR THE BOT IS UNFAVOURABLE HOWEVER, WITH THE EMERGENCE OF SERVICE SECTOR AND GROWING VOLUME OF CAPITAL TRANSACTIONS, THE CONCEPT OF BOT IS NOW LOSING SIGNIFICANCE AND IT IS ACCEPTED THAT THE BOT NEED NOT NECESSARILY BE BALANCED EVERY YEAR

BOP DEFINITION:
BOP IS THE SYSTEMATIC RECORD OF ALL ECONOMIC TRANSACTIONS BETWEEN THE RESIDENTS OF THE REPORTING COUNTRY AND RESIDENTS OF FOREIGN COUNTRIES DURING A GIVEN PERIOD OF TIME THUS, IT IS A SYSTEMATIC RECORD OF ALL ECONOMIC TRANSACTIONS BETWEEN ONE COUNTRY ON THE ONE HAND AND THE REST OF THE WORLD ON THE OTHER, IN A GIVEN PERIOD OF TIME

 BOP IS COMPOSED OF THE FOLLOWING THREE ITEMS: CURRENT ACCOUNT PAYMENT FOR SERVICRES PAYMENTS FOR INVISIBLES

CURRENT ACCOUNT INCLUDES:

1. MERCHANDISE EXPORTS & IMPORTS (a) PRIVATE (b) GOVERNMENT 2. NON-MONETARY GOLD MOVEMENT 3. FOREIGN TRAVEL 4. TRANSPORTATION 5. INSURANCE 6. GOVERNMENT, NOT INCLUDED 7. INVESTMENT INCOME 8. MISCELLANEOUS 9. TRANSFER PAYMENTS (a) OFFICIAL (b) PRIVATE

CAPITAL ACCOUNT INCLUDES :

1. PRIVATE (NON-BANKING) LOANS (a) LONG TERM (b) SHORT TERM 2. BANKING (INCLUDING RESERVE BANK) 3. OFFICIAL (INCLUDING RESERVE BANK) (a) LOANS (b) AMORTISATION (c) MISCELLANEOUS (d) RESERVES (INCLUDING CHANGES IN THE FOREIGN EXCHANGE ASSIST OF THE RESERVE BANK)

 BOP INCLUDES ALL INTERNATIONAL ECONOMIC TRANSACTIONS AND ITEMS SUCH AS MERCHANDISE TRADE, SERVICES, BANKING, INSURANCE, CAPITAL FLOWS, GOLD BUYING / SELLING ETC. BOP, THEREFORE, IS A BROADER CONCEPT AS IT INCLUDES ITEMS COVERED BY THE BOT ALSO AND SHOWS THE COMPLETE PICTURE OF A COUNTRYS INTERNATIONAL ECONOMIC RELATIONS DURING ANY GIVEN PERIOD, UNDER REVIEW.

 EACH COUNTRY WILL HAVE A DEFICIT OR SURPLUS IN ITS CURRENT ACCOUNT AND A DEFICIT OR SURPLUS IN THE CAPITAL A/C. THE SUM OF THESE TWO FIGURES IS CALLED THE DEFICIT OR SURPLUS IN THE BOP FOR THAT PERIOD THE BOP OF A COUNTRY IS SAID TO BE IN EQULIBRIUM WHEN THE DEMAND FOR AND SUPPLY OF FOREIGN EXCHANGE IS PERFECTLY EQUAL. ON THE OTHER HAND, THE BOP IS IN DISEQULIBRIUM WHEN THERE IS A DEFICIT OR SURPLUS IN THE BOP

TYPES OF DIS-EQULIBRIUM IN THE BOP:

TEMPORARY DIS-EQULIBRIUM CYCLICAL DIS-EQULIBRIUM SECULAR DIS-EQULIBRIUM STRUCTURAL DIS-EQULIBRIUM FUNDAMENTAL DIS-EQULIBRIUM

TEMPORARY DIS-EQULIBRIUM
CAUSED DUE TO EVENTS OF NONRECURRING NATURE LIKE WAR, EARTHQUAKE, INDUSTRIAL STRIKES, LOCUSTS DESTROYING CROPS, DROUGHTS etc.

CYCLICAL DIS-EQULIBRIUM
OCCURS WHEN A DEFICIT OR SURPLUS IN THE BOP TAKES PLACE IN AN ALTERNATIVE WAY (SIMILAR TO BUSINESS CYCLES)

SECULAR DIS-EQULIBRIUM
IT OCCURS WHEN AN ECONOMY MOVES FROM ONE STAGE TO ANOTHER i.e. MOVING FROM LOWER LEVEL TO A HIGHER OR NEXT STAGE IN THE PROCESS OF ECONOMIC DEVELOPMENT. IN MOST CASES, IT OCCURS DUE TO RISE IN THE RATE OF CAPITAL FORMATION, ADVANCEMENT IN TECHNOLOGICAL FIELS, EXCESSIVE INVESTMENTS, POPULATION GROWTH etc.

STRUCTURAL DIS-EQULIBRIUM
IT OCCURS WHEN THERE IS A STRUCTURAL CHANGE IN THE ECONOMY AT HOME OR ABROAD WHICH MAY VARY THE DEMAND AND SUPPLY RELATIONS OF IMPORTS AND EXPORTS i.e. TEXTILE EXPORTS SHRINKING OR IT EXPORTS RISING

FUNDAMENTAL DIS-EQULIBRIUM
PERSISTENT DEFICIT OR SURPLUS IN THE BOP OF A COUNTRY OR A RADICAL CHANGE IN ECONOMIC STRUCTURE OF A COUNTRY, GREATLY INFLUENCING THE COUNTRYS IMPORTS AND EXPORTS, CAUSE FUNDAMENTAL DISEQUILIBRIUM

METHODS FOR COLLECTING BOP DIS-EQULIBRIUM:

DEFLATION EXCHANGE DEPRECIATION DEVALUATION EXCHANGE CONTROL FISCAL POLICY IMPORT QUOTAS

DEFLATION
DEFLATION FOLLOW DEFLATIONARY / DEAR MOEY POLICY BY RAISING BANK RATE AND RESTRICTING CREDIT. AS A RESULT, PRICES FALL AND EXPORTS BECOMES ATTRACTIVE AND IMPORTS BECOME RELATIVELY COSTLIER

EXCHANGE DEPRECIATION
IT MEANS A DECLINE IN THE RATE OF EXCHANGE OF ONE COUNTRY IN TERMS OF ANOTHER CURRENCY. IT GENERALLY USES MARKET MECHANISM, IS THEREFORE, AUTOMATIC AND HELPS IN CORRECTING A MILD ADVERSE BOP THIS, IN TURN, STIMULATES EXPORTS BY MAKING THE DOMESTIC GOODS CHEAPER TO THE FOREIGNERS AND, THEREBY, LEADING TO FAVOURABLE BOP.

DEVALUATION
IT MEANS A REDUCTION IN THE OFFICIAL RATE AT WHICH ONE CURRENCY IS EXCHANGED FOR ANOTHER CURRENCY THIS IS AN OFFICIAL ALTERNATIVE TO THE MARKET-MECHANISM AND IT HELPS BRING THE UNDULY OVER-VALUED CURRENCY PRICE TO MARKET REALITIES DEVALUATION HELPS MAKE THE GOODS CHEAPER TO THE FOREIGNERS AND HELPS INCREASE EXPORTS.

DEVALUATION
DEVALUATION AS A COMPETITIVE MEASURE WOULD BE SUCCESSFUL, PROVIDED:
DEMAND ELASTICITY FOR THE EXPORTS IS GREATER THAN UNITY ELASTICITY OF SUPPLY FOR THE GOODS IMPORTED SHOULD BE GREATER THAN UNITY THERE SHOULD NOT BE RETALIATIVE ACTION FROM OTHER COUNTRIES

DEVALUATION DRAWBACKS/PERCEIVED PROBLEMS:

IT MAY LEAD TO INFLATIONARY TENDENCIES IN THE INTERNAL ECONOMY IT CAN BE PERCEIVED/INTERPRETED AS AN OFFICIAL ACKNOWLEDGEMENT OF A COUNTRYS ECONOMIC WEAKNESSES DEBT-SERVICING BURDEN MAY BE PUFFED UP IT MAY TAKE CONSIDERABLE TIME BEFORE THE DESIRED RESULTS ARE YIELDED

EXCHANGE CONTROL
EXCHANGE CONTROL IT IS IMPOSITION OF RESTRICTIONS BY THE CENTRAL BANK OF THE COUNTRY ON THE USE OF FOREIGN EXCHANGE THUS, WHILE ALL THE EXPORTERS HAVE TO SURRENDER THE FOREX EARNED, THE IMPORTERS HAVE TO GET THE REQUIRED FOREX RELEASED FROM THE CENTRAL BANK

FISCAL POLICY
THE GOVERNMENT IMPOSES CUSTOMS / IMPORT DUTIES AND TARIFFS SO AS TO MAKE IMPORTS DEARER/COSTLIER WITH A VIEW TO CURTAILING THE IMPORTS. IF IMPORTS GET REDUCED, BOP CAN IMPROVE

IMPORT QUOTAS
IT IS A MECHANISM UNDER WHICH THE GOVERNMENT FIXES A MAXIMUM QUANTITY OR VALUE OF GOODS TO BE IMPORTED. THIS MEASURE HAS AN IMMEDIATE IMPACT ON IMPORTS, WHICH ARE KEPT UNDER CONTROL. THIS, IN TURN, HELPS REDUCE BOP DEFICIT AND IMPROVES BOP POSITION