Prices of goods manufactured at home influenced by the responsiveness of supply) are :
1. Exchange rates.
2. Trade agreements or barriers.
3. Other tax, tariff and trade measures.
4. Business cycle at home or abroad.
Balance of Payments and Balance of Trade Notes
The balance of trade is a narrow term. It takes into accounts only merchandise exports and imports. Thus, balance of trade takes into account only the transactions arising out of the export and imnort of visible items. In other words, balance of trade does not take into account the exchange of invisible items like services of banking sector, insurance sector, transport sector, tourist industry interest payments and receipts, dividend payments of receipts and such other payments or receipts.
The balance of payments takes into account the export and import of both the visible and invisible items. In other words, it takes into consideration, the export and import of goods of all kinds including consumer goods, consumer durables, fast moving consumer goods, capital goods, machinery and technical equipment and services like banking, insurance, tourism, transportation etc. and payment of salaries, benefits, interest dividends etc.
Thus, balance of payments is a much wider term as compared to balance of trade.
Balance of Payments Accounting Notes
Like other accounting statements, the BOP conforms to the principle of double entry system. This means that every international transaction should produce debit entries of equal magnitude. It is important here that BOP is neither an income statement nor a balance sheet. It is a source and use of statement that reflects changes in assets, liabilities and net worth during a specified period of time. Decrease in assets and increase in liabilities or net worth represents debits or uses of funds. In the context of international transactions, sources of funds include export of goods and services, investment and include import of goods and services, dividends paid to foreign investors, transfer payment abroad, loans to foreigners and increase in reserve assets. In accordance with the principle of double entry bookkeeping, sources and uses should always match.
However, if expenditure abroad by residents of one nation exceeds what the residents of that nation can earn or otherwise receive from abroad, that nation is supposed to have a deficit in its balance of payments. If a nation receives from abroad more than it spends, then the nation can incur a ‘surplus’. BOP accounts show the size of any surplus or deficit which a nation can have and also indicate the manner in which a deficit was financed or the proceeds of a surplus invested.
Components of Balance of Payments
The balance of payments statement records all types of international transactions that a country consummates over a certain period of time.
It is divided into three sections :
1. Current Account : The current account is typically divided into three sub-categories; the merchandise export and import, invisible export and import and unilateral transfers.
Merchandise exports i.e. sale of goods abroad, are credit entries because all transactions giving rise to monetary claims on foreigners represent credits. On the other hand, merchandise imports, i.e. purchase of goods from abroad, are debit entries because all transactions giving rise to foreign money claims on the home country represent debits.
Invisible exports i.e. sale of services, are credit entries and invisible imports i.e. purchase of services are debit entries.
Important invisible exports include sale abroad of services like transport and insurance, foreign tourist expenditure in the home country and income received on loans and investments abroad (interest on dividends).
Purchase of foreign services like transport and insurance, tourist expenditure abroad and income paid on loans and investment in the home country form the important invisible entries on the debit side.
Unilateral transfer account is another term for gifts and includes private remittances, government grants, reparations and disaster relief. Unilateral payment received from abroad are credits and those made are debits.