FACTORS AFFECTING BALANCE

Export of Goods And Services

OF

PAYMENTS

The Prevailing Exchange Rate of the Domestic Currency: A lower value of the domestic currency results in the domestic price getting translated into a lower international price. This increases the demand for domestic goods and services and hence their export. This is likely to result in a higher demand for the domestic currency. A higher exchange rate would have an exactly opposite effect. Inflation Rate: The inflation rate in an economy vis--vis other economies affects the international competitiveness of the domestic goods and hence their demand. Higher the inflation, lower the competitiveness and lower the demand for domestic goods. Yet, a lower demand for domestic goods and services need not necessarily mean a lower demand for the domestic currency. If the demand for domestic goods is relatively inelastic, then the fall in demand may not offset the rise in price completely, resulting in an increase in the value of exports. This would end up increasing the demand for the local currency. For example, suppose India exports 100 quintals of wheat to the US at a price of Rs.500 per quintal. Further, assume that due to domestic inflation, the price increases to Rs.530 per quintal and there is a resultant fall in the quantity demanded to 96 quintals. The exports would increase from Rs.50,000 to Rs.52,800 instead of falling. World Prices of a Commodity : If the price of a commodity increases in the world market, the value of exports for that particular product shows a corresponding increase. This would result in an increase in the demand for the domestic currency. A fall in the demand for domestic currency would be experienced in case of a reduction in the international price of a commodity. This impact is different from the previous one. The previous example considered an increase in the domestic prices of all goods produced in an economy simultaneously, while this one considers a change in the international price of a single commodity due to some exogenous reasons. Incomes of Foreigners: There is a positive correlation between the incomes of the residents of an economy to which the domestic goods are exported, and exports. Hence, other things remaining the same, an increase in the standard of living (and hence, an increase in the incomes of the residents) of such an economy will result in an increase in the exports of the domestic economy Once again, this would increase the demand for the local currency. Trade Barriers: Higher the trade barriers erected by other economies against the exports from a country, lower will be the demand for its exports a hence, for its currency.

Imports of Goods and Services Imports of goods and services are affected by the same factors that affect the exports. While some factors have the same effect on imports as on exports, so of them have an exactly opposite effect. Value of the Domestic Currency: An appreciation of the domestic currency results in making imported goods and services cheaper in terms of domestic currency, hence increasing their demand. The increased demand imports results in an increased supply of the domestic currency depreciation of the domestic currency have an opposite effect. Level of Domestic Income: An increase in the level of domestic income increases the demand for all goods and services, including imports and it results in an increased supply of the domestic currency. International Prices: The. International demand and supply positions deter the international price of a commodity. A higher international price would translate into a higher domestic price. If the demand for imported goods is inelastic, this would result in a higher domestic currency value of in increasing the supply of the domestic currency. In case of the demand elastic, the effect on the supply of the domestic currency would depend the effect on the domestic currency value of imports. Inflation Rate: A domestic inflation rate that is higher than the inflation of other economies, would result in imported goods and services bee relatively cheaper than domestically produced goods and services would increase the demand for the former, and hence, the supply domestic currency. Trade Barriers: Trade barriers have the same effect on imports exports - higher the barriers, lower the imports, and hence, lower the supply of the domestic currency. Income on Investments Both payments and receipts on account of interest, dividends, profits etc., depend on the level of past investments and the current rates of return that can be earned in an economy. For payments, it is the level of past foreign investments and the current domestic rates of return; while for the receipts it is the past domestic investments in foreign economies and the current foreign rates of return, which are relevant. Transfer Payments Transfer payments are broadly affected by two factors. One is the number of migrants to or from a country, who may receive money from or send money to relatives. The second is the desire of a country to generate goodwill by granting aids to other countries along with the economic capability to do so, or its need to take aids and grants from other countries to tide over difficulties.

Capital Account Transactions Four major factors affect international capital transactions. The foremost is the rate of return which can be earned on the investments as compared to the returns that can be earned on domestic investments. The higher the differential returns offered by a country, the higher will be the capital inflows. Another factor is the additional risk that accompanies these returns. More the risk, lower the capital inflows. Diversification across countries may offer some extra benefit in addition to the returns offered by a particular investment. This benefit arises from the fact that different economies may be at different stages of economic cycle at a given time, thus making their performance unrelated. Higher the diversification benefits, higher the inflows. One more factor, which has a very significant affect on these transactions, is the expected movement in the exchange rates. If the exchange rates are quite stable, or the movement is expected to be in the investors' favor, the capital inflows will be higher.

Basis of Difference 1. Definition

Balance of Trade (BOT)

Balance of Payment (BOP) Balance of payment is flow of cash between domestic country and all other foreign countries. It includes not only import and export of goods and services but also includes financial capital transfer. BOP = BOT + (Net Earning on foreign investment - payment made to foreign investors) + Cash Transfer + Capital Account +or Balancing Item or BOP = Current Account + Capital Account + or - Balancing item ( Errors and omissions) Balance of Payment will be favourable, if you have surplus in current account for paying your all past loans in your capital account. Balance of payment will be unfavourable, if you have current account deficit and you took more loan from foreigners. After this, you have to

Balance of trade may be defined as difference between export and import of goods and services. BOT = Net Earning on Export - Net payment for imports

2. Formula

3. Favourable or Unfavourable

If export is more than import, at that time, BOT will be favourable. If import is more than export, at that time, BOT will be unfavourable.

pay high interest on extra loan and this will make your BOP unfavourable. 4. Solution of Unfavourable Problem To Buy goods and services from domestic country. Following are main factors which affect BOT a) cost of production b) availability of raw materials c) Exchange rate d) Prices of goods manufactured at home If you see RBI' Overall balance of payment report, it shows debit and credit of current account. Credit means total export of different goods and services and debit means total import of goods and services in current account. To stop taking of loan from foreign countries.

5. Factors

Following are main factors which affect BOP a) Conditions of foreign lenders. b) Economic policy of Govt. c) all the factors of BOT

6. Meaning of Debit and Credit

Credit means to receipt and earning both current and capital account and debit means total outflow of cash both current and capital account and difference between debit and credit will be net balance of payment.

Meaning of Disequilibrium in Balance of Payment

Though the credit and debit are written balanced in the balance of payment account, it may not remain balanced always. Very often, debit exceeds credit or the credit exceeds debit causing an imbalance in the balance of payment account. Such an imbalance is called the disequilibrium. Disequilibrium may take place either in the form of deficit or in the form of surplus. Disequilibrium of Deficit arises when our receipts from the foreigners fall below our payment to foreigners. It arises when the effective demand for foreign exchange of the country exceeds its supply at a given rate of exchange. This is called an 'unfavourable balance'. Disequilibrium of Surplus arises when the receipts of the country exceed its payments. Such a situation arises when the effective demand for foreign exchange is less than its supply. Such a surplus disequilibrium is termed as 'favourable balance'.

Causes of Disequilibrium in Balance of Payment

1. Population Growth
Most countries experience an increase in the population and in some likeIndia and China the population is not only large but increases at a faster rate. To meet their needs, imports become essential and the quantity of imports may increase as population increases.

2. Development Programmes
Developing countries which have embarked upon planned development programmes require to import capital goods, some raw materials which are not available at home and highly skilled and specialized manpower. Since development is a continuous process, imports of these items continue for the long time landing these countries in a balance of payment deficit.

3. Demonstration Effect
When the people in the less developed countries imitate the consumption pattern of the people in the developed countries, their import will increase. Their export may remain constant or decline causing disequilibrium in the balance of payments.

4. Natural Factors
Natural calamities such as the failure of rains or the coming floods may easily cause disequilibrium in the balance of payments by adversely affecting agriculture and industrial production in the country. The exports may decline while the imports may go up causing a discrepancy in the country's balance of payments.

5. Cyclical Fluctuations
Business fluctuations introduced by the operations of the trade cycles may also cause disequilibrium in the country's balance of payments. For example, if there occurs a business recession in foreign countries, it may easily cause a fall in the exports and exchange earning of the country concerned, resulting in a disequilibrium in the balance of payments.

6. Inflation
An increase in income and price level owing to rapid economic developmentin developing countries, will increase imports and reduce exports causing a deficit in balance of payments.

7. Poor Marketing Strategies

The superior marketing of the developed countries have increased their surplus. The poor marketing facilities of the developing countries have pushed them into huge deficits.

8. Flight Of Capital
Due to speculative reasons, countries may lose foreign exchange or gold stocks People in developing countries may also shift their capital to developed countries to safeguard against political uncertainties. These capital movements adversely affect the balance of payments position.

9. Globalisation
Due to globalisation there has been more liberal and open atmosphere for international movement of goods, services and capital. Competition has beer increased due to the globalisation of international economic relations. The emerging new global economic order has brought in certain problems for some countries which have resulted in the balance of payments disequilibrium.