Balnace of payment affect macroeconomics
- 1. Group Members: Abdul Aziz SP13-EX-0055 Mohammad Ahmed SP13- EX-0052 Mohammad Imran SP13-EX-0057 Suhail Kareem SP13-EX-0015
- 2. WHAT IS BALANCE OF PAYMENT The balance of payments (BOP) of a country is the record of all economic transactions between the residents of a country and the rest of the world in a particular period (over a quarter of a year or more commonly over a year). These transactions include payments for the country's exports and imports of goods, services, financial capital, andfinancial transfers.
- 3. Difference between BoP and BoT Balance of Trade The Balance of Trade includes only visible imports and exports, i.e. imports and exports of merchandise, the difference of imports and exports is called Balance of Trade. In case of Balance of Trade, there is no deficit or surplus balance. The balance shows favourable or non-favourable. So, external assistance is not required
- 4. Balance of Payment The Balance of Payments includes all those visible and invisible items exported from and imported into the country in addition to exports and imports of merchandise. In case of Balance of Payments, any balance, deficit or surplus is to be financed by external source or assistance or be utilized.
- 5. BALANCE OF PAYMENT When a payment is received from a foreign country, it is a credit transaction while a payment to a foreign country is a debit transaction. The principal items shown on the credit side are exports of goods and services, unrequited or transfer receipts in the form of gift etc. from foreigners, borrowings from abroad, foreign direct investment and official sale of reserve assets including gold to foreign countries and international agencies.
- 6. Conti…… The credit and debit items are shown vertically in the BOP account of a country. Horizontally, they are divided into three categories, i.e. (a) The current account, (b) The capital account, and (c) The official settlements account or official reserve assets account
- 7. (a) The Current Account: It includes all international trade transactions of goods and services, international service transactions (i.e. tourism, transportation and royalty fees), and international unilateral transfers (i.e. gifts and foreign aid).
- 8. (b) The Capital Account: Financial transactions consisting of direct investment and purchases of interest-bearing financial instruments, non-interest bearing demand deposits and gold comprise the capital account
- 9. (c) The Official Reserve Assets Account: Official reserve transactions consist of movements of international reserves by governments and official agencies to accommodate imbalances arising from the current and capital accounts. such as central banks, to finance trade imbalances, check the impact of foreign exchange fluctuations and address other issues under the purview of the central bank. Reserve assets should be liquid and under the monetary authority's control.
- 10. Capital account problem: The deficit in Current Account of BOP may be washed out by a surplus in capital account. But this is not the case with Pakistan. We have to face the following problems relating to capital account: (i) The foreign official loans are specific and tied in nature and are attached with political interference and heavy rates of interest. (ii) A lot of amount is spent on repayment of loans and debt servicing. (iii) The private investors are still hesitant in making investment in our country because of several reasons, like political instability, lack of proper infra-structure, lack of energy generation plants, involvement of official procedures, and the element of stubbornness in the country.
- 11. Trade restrictions of developed countries: The trade barriers raised by developed countries against the import of manufactures especially on agricultural products by the developing countries is one of the important factors preventing greater production and export by some industries in Pakistan, particularly the cotton textile industry. The dismantling of these barriers through negotiations can go a long way in increasing Pakistan’s exports of manufactured goods.
- 12. Inflation: Inflationary conditions are a serious obstacle to the promotion of exports. Inflation results in a rise in the domestic cost of production so that the goods produced cannot compete in the world market, if the rate of exchange is not suitably adjusted. So the control of inflation is essential for keeping Pakistani goods competitive and for promoting exports.
- 13. Ever-increasing demand for imports: Our socio-economic set-up is import and ultra import biased. People have craze to purchase imported goods. Accordingly, the demand for imported vehicles, consumer durables, ( it takes many years and multiple uses to wear it out. ) electronics, etc. is increasing day by day. Moreover, the increased population, urbanisation and demonstration effect has necessitated the increase in demand for imported goods.