Balance Of Payment And Others In Commerce

Balance Of Payment And Others In Commerce

BALANCE OF PAYMENT – The balance of payments account is the record of a country’s trading with the rest of the world over a period of time(usually a ear). Items may be classified under one of four headings: visible export, visible import, invisible export, or invisible import, The term visible refers to payments for goods, while invisible refers to payments for services. An export is any transaction which involves currency coming into the country.

An import is any transaction which involves money leaving the country. Thus the sale of oil by Nigeria to the United States would be a visible export it involved a tangible good and earned revenue for Nigeria. On the other hand, if a Nigerian oil executive flew to the United States with an American airline, then this would be an invisible import as it involved the use of a service(transport)and resulted in money being paid overseas.

In addition to the services that are studied in commerce, invisible also include profits earned by companies’ overseas subsidiaries and military and diplomatic spending by government outside their own countries. Thus for example expenditure by the American embassy in Nigeria is an invisible export as it earns currency for Nigerian.

Balance of trade and balance of payments – The difference between visible exports and visible imports termed the balance of trade. If this is added to the difference between invisible exports and invisible imports then the balance of payments is found.

The final result in the balance of payments may be positive or negative. A positive result is termed a surplus whilst a negative result is termed a deficit.

GOVERNMENT POLICY

If a country has a balance of payments deficit, then it will have to borrow funds or draw from its reserves of foreign currencies in order to cover the excess expenditure. However, this situation cannot continue indefinitely, for the reserves may soon be expended and the lenders, such as the International Monetary Fund and foreign banks, demand repayment.

In order to remove a deficit a country will try to discourage imports and encourage exports. This can be accomplished by devaluing the currency, that is, reducing the exchange rate between the local currency and those of other countries. This has the effect of making exports cheaper and hence more desirable to customers overseas, whilst imports become more expensive and hence less desirable to domestic consumers.

The government may also place taxes, or tariffs, on imported goods. These may be place ad valorem, which means on the value of the goods, or as specific duties which are charged per unit on the goods imported. Tariffs not only discourage imports but also raise revenue for the government. Quotas may be set to allow only a certain quantity of the good to be imported or ban it altogether. Help may also be given to domestic manufacturers to make them more competitive.

A danger of all these measures is that they may provoke retaliation from other countries leading to an overall reduction in the volume of trade. This could be bad for all concerned as it would lead to a reduction in specialization, the advantages of which were discussed earlier.

In order to promote foreign trade countries have formed them selves into various trade groupings, such as ECWAS and the European Economic Community.

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