BALANCE OF VISIBLE TRADE Balance of visible trade is also known as balance of merchandise trade, and it covers all transactions

related to movable goods where the ownership of goods changes from residents to non-residents (exports) and from non-residents to residents (imports). The valuation should be on F.O.B basis so that international freight and insurance are treated as distinct services and not merged with the value of goods themselves. Exports valued on F.O.B basis are the credit entries. Data for these items are obtained from the various forms that the exporters have fill and submit to the designated authorities. Imports valued at C.I.F are the debit entries. Valuation at C.I.F. though inappropriate, is a forced choice due to data inadequacies. The difference between the total of debits and credits appears in the Net column. This is the Balance of Visible Trade. In visible trade if the receipts from exports of goods happen to be equal to the payments for the imports of goods, we describe the situation as one of zero goods balance. Otherwise there would be either a positive or negative goods balance, depending on whether we have receipts exceeding payments (positive) or payments exceeding receipts (negative). UNILATERAL TRANSFERS Unilateral transfers or unrequited receipts, are receipts which the residents of a country receive for free, without having to make any present or future payments in return. Receipts from abroad are entered as positive items, payments abroad as negative items. Thus the unilateral transfer account includes all gifts, grants and reparation receipts and payments to foreign countries. Unilateral transfer consist of two types of transfers: (a) government transfers (b) private transfers. Foreign economic aid or assistance and foreign military aid or assistance received by the home countrys government (or given by the home government to foreign governments) constitutes government to government transfers. The United States foreign aid to India, for BOP 9but a debit item in the US BOP). These are government to government donations or gifts. There no well worked out theory to explain the behaviour of this account because these flows depend upon political and institutional factors. The

government donations (or aid or assistance) given to government of other countries is mixed bag given for either economic or political or humanitarian reasons. Private transfers, on the other hand, are funds received from or remitted to foreign countries on person to person basis. A Malaysian settled in the United States remitting $100 a month to his aged parents in Malaysia is a unilateral transfer inflow item in the Malaysian BOP. An American pensioner who is settled after retirement in say Italy and who is receiving monthly pension from America is also a private unilateral transfer causing a debit flow in the American BOP but a credit flow in the Italian BOP. Countries that attract retired people from other nations may therefore expect to receive an influx of foreign receipts in the form of pension payments. And countries which render foreign economic assistance on a massive scale can expect huge deficits in their unilateral transfer account. Unilateral transfer receipts and payments are also called unrequited transfers because as the name itself suggests the flow is only in one direction with no automatic reverse flow in the other direction. There is no repayment obligation attached to these transfers because they are not borrowings and lendings but gifts and grants exchanged between government and people in one country with the governments and peoples in the rest of the world.

1) Gold Bullion Standard: The basis of money remains a fixed weight of gold but the currency in circulation consist of paper notes with the authorities standing ready to convert unlimited amounts of paper currency in to gold and vice-versa, on demand at a fixed conversion ratio. Thus a pound sterling note can be exchanged for say x ounces of gold while a dollar note can be converted into say y ounces of gold on demand. 2) Gold Exchange Standard: Gold Exchange Standard was established in order to create additional liquidity in the international markets. Hence the some of the countries committed themselves to convert their currencies into the currency of some other country on the gold standard rather than into gold. The authorities were ready to convert at a fixed rate, the paper currency issued by them into the paper currency of another country, which is operating a gold specie or gold bullion standard. Thus, if rupees are freely convertible into dollars and dollars in turn into gold, rupee can be said to be on a gold exchange standard. 3) The Gold Standard:

This is the oldest system which was in operation till the beginning of the First World War and a for few years thereafter ie it was basically from 1870 - 1914. The essential feature of this system was that the gouvernment gave an unconditional guarentee to convert their paper money to gold at a prefixed rate at any point of time or demand. 4) Triffins Paradox: The Bretton Woods System had some contradictions which were pointed out by Prof. R Tryffin which were :- The system depended on the dollar performing and its role as a key currency. Countries other than the U.S had to accumulate dollar balances as the dollar was the means of International payment. This meant that the US had to run BOP deficits so that other countries could build up a stock of claims on the US. When the US deficits started mounting, other countries started losing faith in the ability of the US to convert their dollar asset into gold. 5) Fixed exchange rate As the name suggests, under fixed exchange rate system, the value of a currency in terms of another is fixed. These rates are determined by governments or central banks of the respective countries. The fixed exchange rates result from pegging their currencies to either some common commodity or to some particular currency. The rates remain constant or they may fluctuate within a narrow range. When a currency tends crossing over the limits, governments intervene to keep within the band. Normally countries pegs its currency to the currency in which the major transactions are carried out or some countries even peg their currencies to SDR. For example : - US dollar has 24 currencies pegged to itself whereas French franc has 14 currencies and 4 currencies are pegged to SDRs. The major advantage of this system is that it provides stability to international trade and exchange rate risk is reduced to some extent. Because of the fixed exchange rate system, exporters and importers are clear how much they have to pay each other on the due date. The disadvantage is that it is prone to speculation i.e. a speculator anticipating devaluation of pound sterling will buy US dollars at a forward rate so as to sell them when devaluation of the pound takes place. 6) Floating Exchange Rates: When the relative price of currencies are determined purely by force of demand and supply and when the authorities make no attempt to hold the exchange rate at any particular level within a specific band or move it in a certain direction by intervening in the exchange markets, it is referred to as Floating Exchange Rate. 7) Crawling Peg: A crawling peg rate is a hybrid of fixed and flexible exchange rate systems. Under this system, while the value of a currency is fixed in terms of a reference currency, this peg keeps on changing itself in accordance with the underlying economic fundamentals, thus letting the market forces play a role in the determination of the change in exchange rate. There are several bases which could be used to determine the direction of change in the exchange rate for example

 the actual exchange rate ruling the market, t there is gradual modifications with permissable variations around the parity restricted to a narrow band. The change in parity per unit period is subject to a ceiling with an additional short term constraint, e.g. parity change in a month cannot be more than 1/12th of the yearly ceiling. Parity changes are carried out , based on a set of indicators. They may be discretionary, automatic or presumptive. The indicators are : current account deficits, changes in reserves, relative inflation rates and moving average of past spot rates. Countries such as Portugal and Brazil have in the part adopted variants of Crawling Peg.

8) Adjustable Peg: Adjustable Peg system was established which fixed the exchange rates, with the provision of changing them if the necessity rose. Under the new system, all the members of the newly set up IMF were to fix the par value of their currency either in terms of gold, or in terms of US dollar. The par value of the US dollar was fixed at $ 35 per ounce. All these values were fixed with the approval of the IMF, and were reflected in the change economic and financial scenario in the countries engaged in international trade. The member countries agreed to maintain the exchange rates for their currency within a band of one percent on either sides of the fixed par value. The extreme points were to be referred to as upper and lower support point, due to which requirement that the countries do not allow the exchange rate to go beyond these points. The monetary authorities were to stand ready to buy or sell the US dollar and thereby support the exchange rates. For this purpose, a country which would freely buy and sell gold at the aforementioned par value for the settlement of international transactions was deemed to be maintaining its exchange rate within the one percent band.

9) Special Drawing Rights(SDRs): The IMF created an asset called Special Drawing Rights by simply opening an account in the name of each member country and crediting it with a certain amount of SDRs. The total volume created has to be ratified by the gouverning board and its allocation among the members is propotional to their quotas. The members can use it for settling payments among themselves as well as for transactions with the fund. E.g. paying the reserve tranch contribution of an increase in their quotas. 10) Devaluation : The lowering of a countrys official exchange rate in relation to a foreign currency (or to gold) so that exports compete more favourably in the overseas markets. Devaluation is the opposite to revaluation. 11) Lerms: An acronym for liberalization Exchange Management System that was introduced from March 1, 1992 under which the rupee was made partially convertible. The objective was to encourage exporters and induce a greater inflow of remittances through proper channels as well as bring about greater efficiency in import substitution. Under the system, percent of eligible foreign exchange receipts such as exports earnings or remittances was to be converted at the market rate

and the balance 40% at the official rate of exchange. Importers could obtain their requirements of foreign exchange from authorized dealers at the market rate. Because of certain weaknesses, this system was replaced by a unified exchange rate in March 1993. This unification was recommended as an important step towards full convertibility by the committee on balance of payments under the chairmanship of C Ragranajan. Under the unified rate system all foreign exchange transactions through authorized dealers out at market determined rate exchange.

12) Custom Union: Custom Union is a form of economic integration in which two or more nations agree to free all internal trade amongst themselves while levying a common external tariff on all non-member countries. The theory of custom unions and economic integration is associated primarily with the work of Prof. Jacob Viner in the 1940s. This theory mainly focuses on optimum utilization of resources present in the member countries. Integration provides the opportunity of industries that have not yet been established as well as for those that have to take advantage of economies of large scale production made possible by expanded markets.

13) Dirty float: The authorities are intervened more or less intensely in the foreign exchange market in which there are no officially declared parties, but there is official intervention that has come to be known as managed or dirty float. 14) Gold Tranche: Member countries have an absolute claim on the IMF upto the amountof gold subscriptions they have made. In operational terms, they can draw this amount (= 25% of their quota) from IMF any time. This is called reserve tranche or gold tranche and is treated as the reserve of the country concerned. However, this sum is reimbursed to the IMF within a specified period varying from 3 months to 5 years. 15) Credit Tranches : Any member can unconditionally borrow the part of its quota which it has contributed in the form of SDRs or foreign currency. When it can borrow upto 100% of its quota in four futher tranches it is called credit tranches. (Tranche means a slice) 16)International Liquidity : It refers to the stock of means of international payment

17) Extended Fund Facility (EFF):

This facility was established in 1974 by the IMF to help countries address more protracted balance-of-payments problems with roots in the structure of the economy. Arrangements under the EFF are thus longer (3 years) and the repayment period can extend to 10 years, although repayment is expected within 4 -7 years.