Balance Of Payments

Definition: Is a statement which systematically records all financial transaction between a country and the rest of the world. Structure of Malaysian Balance of payment (a) Current Account -Is used to record the inflow and outflow of goods and services into and out of a country, incomes payment and receipt as well as current transfer. -Positive/surplus of the current account means more goods and services are sent out of the country than goods and services brought into the country. - It consists of 4 main items which are: 1. Goods The balance between merchandise export and import is called balance of trade. 2. 3. Services Income Income inflows into Malaysia are from investment made by Malaysian overseas such as buying of shares in foreign countries (Portfolio investment) and real estate investment, and inflow of incomes in the form of interest and rental. 4. Current Transfer Example: gift made by our government, charitable organisations or private parties elsewhere in the world.

(b) Capital Account - Positive/surplus of capital account means we borrowed money from other parties such as International Monetary Fund (IMF) and vice versa.

(c) Financial Account - Records all transaction associate with the changes of ownership in the foreign financial assets and liabilities of an economy. - It consists of 4 main items which are: 1. Direct Investment Foreign direct investment traditionally defined as a company from one country making a physical investment into building a factory in another country. 2. Portfolio Investment Is a cross-border investment in equity and debt securities other than direct investment. It is indirect investment involve in paper claims without obtaining a voice in the management. 3. 4. Other Investment Errors and Omissions

Ways To Reduce Balance Of Payment Deficit Balance of payment deficit is a situation when cash outflow greater than cash inflow in the country. There are a few of ways to reduce the deficit:1. Reduce aggregate demand

This can be done by using contractionary fiscal and tight monetary policies. It will reduce disposable income and purchasing power. When tax increase, demand for import goods will decrease, when demand decrease, they will demand less import. As a result, it will reduce the amount of cash outflow.

2. Obtain short-term capital inflow

The government can offer higher interest rate, so that in short-term, foreign investors will grab this opportunity to invest in our company. This will ensure money inflow in one country in short-term time.

3. Stimulate Export The government should give subsidies to producer. When subsidies given to the producer, so they can produce more and thus they can export more item to other country. Therefore, they will gain more profit. The government also needs to decrease the taxes for export goods. This action will lead to the increases of export activities among the big company inside the country. They also can produce more goods because of the low taxes. The other solution is, the government can arrange an export exhibition to tell more about the benefit of export activities. This exhibition will attract producer to export their product to other country and this can reduce the deficit of balance of payment.

4. Reduce Import Government should impose trade barrier such as tariff and quotas. If a country imposed tariffs on various imports, then their prices will rise relative to the home produced goods and so the demand for imports should fall and switch to domestically produced goods. The foreign firm could absorb the cost of the tariff, take a cut in profits and not raise their price, but this is not a long term solution for them. Tariffs generally cause import prices to rise. For quotas, by restricting import through quotas system, the deficit will be reduced and the balance of payment position is improved.