Deficit Balance Of Payment

CONTENT

1. How to finance deficit balance of payment.
2. Devaluation of currency – meaning and effect.
3. Economic Integration – definition, objective and problems.
4. Balance of trade definition and measurement.
5. Terms of Trade – definition and measurement.
6. Balance of payment (current A/c, capital A/c and monetary movement A/c).

BALANCE OF TRADE

Balance of Trade – This is the comparison of a country’s total visible exports with her total visible imports.  When visible exports with her total visible imports in monetary terms are equal we have Balance of Trade.  A positive or favourable Balance of Trade – means that a country is exporting more in monetary terms than it is importing while a negative or unfavourable balance of trade means that a country is importing more in monetary terms than it is exporting.

BALANCE OF PAYMENT

Balance of payment may be defined as a statement or record showing the relationship between a country’s total payments to other countries and its total receipts from them in a year.  A country’s Balance of payment is grouped into three parts.

1.   Current Account

2.   Capital Account

3.   Monetary movement Account

A.   Current Account: The Current Account is made up of receipts and payments for visible and invisible services.  The visible comprises tangible products such as cars, computer, clothing materials, electronics etc. While the invisible services are: insurance, banking, transport, interest payment and tourism.

B.   Capital Account: For a country to set up business in other countries, and for other countries to set up business in its country, there is need for inflow and outflow of capital both in long and short term; this is contained in the capital account.  This is in the form of investments, loans and grants.

C.   Monetary Movement Account: There is need for differences in Current Account and Capital Account to be settled.  This is done in the monetary movement Account.

EVALUATION

Write short note on (a) Balance of trade.         (b)Balance of payment.

TERMS OF TRADE

Term of trade is the rate at which a country’s export is exchanged for her import.  It is expressed as arelationship between the prices a country receives for its exports and the prices it pays for import.

            Terms of Trade (TOT) = Index of import price   x   100

                                                Index of import price1 The terms of Trade are favourable if the average price of exports is higher than the average price of imports. The terms of Trade are unfavourable, if the average import price is higher than the average export price, which results in more expensive import than exports and this situation makes the Terms trade to deteriorate.  When the Terms of Trade are unfavourable, the index is less than 100.  This will reduce the real national income.

The Balance of payment of a country can either be favourable or unfavourable, in most cases it could be balance.  A country’s Balance of payment is said to be favourable when the receipts from invisible and visible export trade becomes greater than payment to other countries on invisible and visibleimports.  A credit balance can be used to increase investment or to add to a country’s gold reserve. 

In other hand, unfavorable balance of payment is said to occur when the payments on visible and invisible import is greater than receipts on visible and invisible exports.  This is also known as adverse or deficit balance.

HOW TO FINANCE DEFICIT BALANCE OF PAYMENT

Different Options opened to a country seeking to correct her adverse balance of payment.  The following options could be considered;

1.   A country can borrow from foreign financial institutions e.g. World Bank, Paris Club.

2.   Assistance could be sought from international financial institutions

3.   Foreign investment could be disposed off to offset the debt (if any).

4.   Gold could be exported (if any).

5.   The national economy could be deflated through monetary and fiscal measures.

6.   Import substitution – This could be in form of curtailment of imports and export stimulation.

7.   The country’s currency could be devalued, this would encourage export and discourage import.

8.   Gifts and aids from friendly countries can be used to settle the indebtedness.

9.   The interest rates can be raised to encourage inflow of foreign capital.

10. Export promotion.

EVALUATION

1.   Suggest any five ways a country can finance Deficit Balance of Payment.

2.   Distinguish between favourable and unfavourable Balance of Payment

DEVALUATION OF CURRENCY

A country devaluation of currency is a deliberate policy through which the value of one country’s currency is reduced in relation to other country’s currency.  It can also be defined as a fall in the exchange value of a country’s currency in relation to the currencies of other countries.

EFFECTS OF DEVALUATION OF CURRENCY

1.   The exports of the country whose currency is devalued becomes cheaper.

2.   As a reverse to the above, the import too becomes expensive.

3.   Since the exports become cheaper, more would be sold abroad.

4.   Balance of payment improvement – as said earlier, when more are sold abroad, foreign exchange accruing to the nation can be used to improve the Bop of the nation.

5.   There is increase in number of industries which will lead to increase in employment.

CONDITIONS IN WHICH DEVALUATION CAN IMPROVE A COUNTRY’S BALANCE OF

PAYMENT

1.   The demand for import must be elastic.  Increase in prices of imports, as a result of devaluation will lead to fall in demand for import.

2.   The country’s export must be elastic i.e. It should be able to response to foreign demand.

3.   Other countries must not devalue their own currencies.

4.   There must be no increase in wages and other incomes.

MATHEMATICAL APPROACH TO CURRENCY DEVALUATION

The rate at which a country exchanges her currency for other countries currencies is known as “Exchange rate”.

Example I

Assuming that Nigeria in willing to buy or sell cocoa at N800 per ton and the USA is willing to buy or sell at $100, then the value of the two currencies can be fixed as ………..

N800  =  $100

N8      =  $1

Example II

If the exchange rate of naira to dollar is as follow:

If Nigeria devalues her Currency by 100%, the new exchange will be …. If formerly

N100  =  $1

=   100   x   100   =  N100

     100   x     1

N100  +N100  =  N200

Hence   N500  =   $.50

EVALUATION

1.   State five effects of currency devaluation.

2.   Illustrate how currency devaluation can help to correct adverse balance of payment.

ECONOMIC INTEGRATION

Every country in the world strives to achieve economic growth and development.  This is better achieved when countries pull their resources together to achieve greater efficiency.  This give rise to Economic Integration.  Economic integration may be defined as a form of international cooperation among nations to foster their economic interests.  A good example of an economic integration in Africa is the Economic Community of West African States (ECOWAS).  Other economic integration includes: European Economic Community (EEC), African Development Bank (ADB), the Chad Basin Commission, InternationalMonetary Fund (IMF).

OBJECTIVES OF ECONOMIC INTEGRATION

The following are the objectives of Economic Integration:

1.   To enlarge market that will encourage large scale production.

2.   Economic integration enhances efficiency that reflects in production units.

3.   It enhances greater resources mobility.

4.   To encourage specialization among countries coming together.

5.   To empower each country to participate effectively in the World market.

6.   To create job opportunities.

7.   To improve the living standard of member nations.

8.   To accelerate economic development in the region.

FORMS OF ECONOMIC INTEGRATION

1.   Free trade area.

2.   Common Market

3.   Economic union e.g. ECOWAS

4.   Customs union

PROBLEMS OF ECONOMIC INTEGRATION IN WEST AFRICA

1.   The smaller countries always nurse fear of big countries’ domination.

2.   The formula to adopt in sharing the revenue generated by the groups often generate more heat than light.

3.   Differences in economic and political ideology often make the countries to disagree.

4.   Member nations speak different languages.  This slows down decision making.

5.   Member nations are unwilling to surrender their sovereignty to bigger countries.

6.   Frequent changes in government of member nations often affect decision making.

7.   Some of the members of economic union e.g. ECOWAS are still tied to the apron of their colonial masters.

8.   Inadequate capital – e.g. ECOWAS cannot meet their plan due to the fact that some countries within the union could not pay their subscription.

EVALUATION

1.   Define Economic Integration.

2.   State any five objectives of Economic Union.

3.   Outline any five problems facing Economic Integration.

EVALUATION

1. What is Current Account Balance?
2. Study the following information carefully and use it to answer questions.  As a result of the improvement in terms of trade of two of a country’s major export commodities, the totalforeign exchange receipts increased by over 10% above that of the previous years, 1997.  Nevertheless, thiswas not sufficient to balance the country’s current account.  The government therefore took a shortterm loan of $100 million from the international Monetary Fund (IMF).

READING ASSIGNMENT

1.   Amplified and Simplified Economics for SSS by Femi Longe  page 426-446.

2.   Essential Economics for SSS by C E Ande page 386-395.

GENERAL EVALUATION

1. What is Trade Union?
   1. Describe any four functions of Trade Union.
      1. What are Infant Industries?
      1. Outline four objectives of price control policy.
      1. Describe three functions of money.

WEEKEND ASSIGNMENT

1.   The rate at which a country’s export is exchanged for her import is known as ………..

      A.  Terms of Trade       B. Balance of Trade      C. Current balance        D. Visible balance

2.   Invisible trade refers to trade in ……… A. services        B. good and services        C. tangible goods       D. short term and long term capital    E. capital goods that cannot be seen

3.   Balance of Trade can be defined as ………. A. the value of imports in relation to the value of a country’s exports       B.  the price ratio of imports as against that of exports.   C  Equality in the total receipts and payments of a country in a year      D. percentage value of imports over percentage value of exports       E. price of exports versus prices of imports.

4.   A summary of all the receipt and payment of a country in international transacts is called..…… A.  Terms of trade            B. Balance of payment C. Balance of payment adjustment

      D.  Capital Account

5.   Invisible trade refers to trade in………… A. services      B.  goods and services     C.  tangible goods     D. Crude oil

THEORY

1.   If the united kingdom buys gold for ₤60 ounce and Nigeria buys the same ounce for N500, what will be the United Kingdom’s exchange rate with Nigeria.

2.   Distinguish between Balance of Payment and Balance of Trade.