Posted by Anjali Kaur on Nov 23, 2020

Balance of Trade

The balance of trade includes only material goods of trade. It is defined as the difference between the exports of material goods and imports of material goods.

Balance of trade = Exports of goods – Imports of goods

The current account of BOP = Balance of Trade + Exports and imports of services

 Let’s understand this topic in detail.

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Autonomous Transaction (Above the line transactions)

These are referred to as economic transactions with the rest of the world which takes place due to some economic motive for maximizing profit.

These are independent of the countries balance of payment situations.

These transactions are undertaken by both private and government sectors.

It takes place on both current and capital account.

Accommodating Transactions (Below the line transactions)

These are undertaken to establish Balance of payment equilibrium.

Accommodating transactions are affected by the BOP situation.

These are undertaken by only the government sector.

These transactions takes place only in the capital account.

Disequilibrium in the Balance of Payment

It is a state of either deficit in BOP or a surplus in a BOP. There are 2 types of disequilibrium:

1. Surplus BOP ( Exports > Imports)

Surplus BOP means the excess of exports of goods and services over imports of goods and services.

When the payments that are, debits of the country are less than the receipts that are credit. The BOP is said to be in surplus, that is, the inflow of foreign exchange is more than the outflow of foreign exchange, then BOP is considered to be in surplus.

This is called a favorable situation because foreign exchange inflow is more than the outflow.

2. Deficit BOP ( Exports < Imports)

Excess of imports over the exports of the goods and services is known as the deficit in a BOP.

When payments of the country are more than the receipts in BOP, it is said to be a deficit, that is, the outflow of foreign exchange is more than the inflow of foreign exchange than the BOP is said to be in deficit.

This is called an unfavorable situation as it causes a decrease in the official reserve of the foreign exchange.

BOP that is Balance of Payment is a better indicator of economic growth than Balance of trade because BOP includes trades in goods as well as services.

Current Account Deficit (CAD)

Current Account Deficit (CAD) refers to excess payments for the value of import of visible items, invisible items, and unilateral transfers over the receipts from the value of export of visible items, invisible items, and unilateral transfers.

Trade Deficit

Trade deficit refers to the excess of the payments for the value of import of visible items over the value of receipts of export of visible items.

Thank You for reading.

You can read the related post on macroeconomics:

The foreign exchange rate

The Budget Expenditure

The Budget Deficit

The Government Budget

Working of the Investment

Investment Multiplier

Types of Employment Equilibrium

Concept of Short-Term Equilibrium

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