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Balance
of payments (continued)
Yvonne
Harvey, Contributor
Hello
again! Before you read this week's
lesson, it would be a good idea for
you to read over the lessons for international
trade and balance of payments. Now
you may continue with the lesson.
THE
BALANCE OF PAYMENTS MUST BALANCE
Ultimately,
the balance of payments must balance
since every export becomes an import
and every import an export. Balancing
the balance of payments means that
there must neither be a surplus nor
a deficit in the end. A way must be
found to finance the surplus or deficit
through external strategies which
are shown in the official financing
account.
(a)
Define the term balance of payments.
(a)
What is meant by a country's balance
of trade?
(b)
Calculate the BALANCE OF TRADE for
the country
shown
below:
| Visible
trade |
US
($ M) |
| Exports |
26,000 |
| Imports |
29,000 |
| |
| Invisible
(net) |
|
| Exports |
20,000 |
| Imports |
15,000 |
(d)
Name TWO items that are regarded as
invisibles.
(e)
Calculate the current account balance.
THE
OFFICIAL FINANCING ACCOUNT
This
account shows how the balance of payments
is financed; that is, it shows what
is done with the surplus or the deficit
on the balance of payments. Let us
look at some ways of financing a balance
of payments deficit.
FINANCING
A BALANCE OF PAYMENTS DEFICIT
- borrowing
from international financial institutions
like the International Monetary
Fund and the World Bank
- borrowing
locally
- drawing
down on the official reserves of
foreign exchange
- selling
an asset locally or overseas
- borrowing
from other countries
- receiving
gifts and grants
- rescheduling
of the debt
- Importing
on credit. Permission must be granted
from the exporting country.
What
if the balance of payments showed
a surplus? This surplus could be financed
or used in the following ways.
FINANCING
A BALANCE OF PAYMENTS SURPLUS
- lend
money, for example to other countries
- purchase
an asset locally or overseas
- increase
the official reserves of foreign
exchange
- pay
outstanding debts
- invest
the surplus
- give
gifts and grants to other countries
Below
is an example of the official financing
account. Assume that the balance of
payments figure is US$1,500m.
THE
OFFICIAL FINANCING ACCOUNT
| |
US
$M |
| Foreign
currency borrowing |
+800 |
| Official
reserves |
+700 |
| Total |
+1500 |
Now
we have balanced the balance of payments
by eliminating the deficit of US $1,500m.
What
if a country continues to have an
adverse balance of payments, year
after year? Well, that country must
find ways of correcting that adverse
balance of payments. The country has
a balance of payments problem and
must, therefore, earn more by: increasing
exports through:
- offering
incentives and subsidies to local
manufacturers
- encouraging
foreign investment
-
extending credit facilities
-
reducing spending
- improving
marketing skills and sponsoring
exhibitions
- devaluing
the local currency, which makes
exports cheaper
Reducing
imports by:
- increasing
tariffs (duties) on imported goods
and services
- setting
quotas to limit the physical amount
imported
- requiring
special licences to import
- devaluation,
which makes imports dearer
- foreign-exchange
controls, which limit the amount
of foreign currency available to
individuals
The
questions below will test how much
you have grasped of this lessons.
(a)
What is the official financing account?
(2 marks)
(b)(1)
List TWO ways of financing a balance
of payments surplus (2 marks)
(11)
List TWO ways of financing a balance
of payments deficit (2 marks)
(c)
A country has a balance of payments
of US$ + 300m, draw up the official
financing account to show how this
may be financed (2 marks)
(d)
Explain TWO ways of correcting an
adverse balance of payments.
Total:
10 marks
That's
it for this week. I hope you have
all done well on your SBAs. Remember
that the SBA gives you a chance of
going into the exam with a maximum
of 20 per cent.
Bye
until next week.
Yvonne
Harvey teaches at Glenmuir High School.
Send questions and comments to kerry-ann.hepburn@gleanerjm.com
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