BALANCE OF PAYMENTS

ADJUSTMENTS IN THE THIRD

WORLD
MELANIE B. BIARES
 INTERNATIONAL TRADE
• refers to the exchange of goods and services between one country
and other countries.
• The poor countries exchange their agricultural crops and raw
materials with the machines and industrial equipment of the rich
countries.
• Under a modern market economy, such exchanges are being done
through the use of money which has an international acceptability
like the US dollar.
 INTERNATIONAL TRADE
• The Mediterranean Sea became the center of trade, and the Romans
dominated such trade. However, the invasions of the Barbarians put
an end to the prosperous Mediterranean trade.
• Feudalism was only form of economy which subsisted on primitive
agriculture. With the growth of cities and towns in Europe, together
with geographical discoveries and the revival of learning
(Renaissance), a strong merchant class cropped up. This paved the
way for the emergence of mercantilism.
 INTERNATIONAL TRADE
• Mercantilism is a politico-economic doctrine that believes that the
power and glory of a country emanates from the acquisition of more
gold and silver through a favorable foreign trade.
• The Galleon Trade in the Philippines was an example of
mercantilism during the Spanish time.
BASES OF INTERNATIONAL TRADE
1. Distribution of economic resources. The allocation of natural
resources, labor, and capital goods (machines) is not even. When a top
Japanese government official saw the United States, he said God has not
been fair in the distribution of natural resources.
In view of its extreme poverty in natural resources, Japan imports about 95
percent of its raw materials for its factories and industries.
Countries with plenty of arable lands produce land-intensive products like
rice while those that have oversupply of labor produce labor-intensive
products like transistor radios. In the case of countries which have industrial
economy, they have abundant capital.
BASES OF INTERNATIONAL TRADE
2. Technological efficiency.
• All other things being equal, a country which has the best technology can
produce goods with the lowest price, best quality and highest quantity.
Due to the application of modern farm technology, Japan and the United
States can easily produce 300 cavans of palay per hectare per harvest.
Most agricultural countries can only harvest an average of 50 cavans per
hectare. And because of lack of irrigation system, they can only plant rice
once a year. Those with water supply can plant three times a year.
BASES OF INTERNATIONAL TRADE
2. Technological efficiency.
In highly developed countries, they use modern technology in both
product and service industries. Definitely, they enjoy a comparative
advantage in the production of finished products like machines, cars,
tractors, airplanes, and other industrial goods. These are exported to
the less developed countries where such products cannot be
manufactured.
ADVANTAGES OF INTERNATIONAL TRADE

1. Economic growth
2. trade stimulates product specialization due to the very keen
competition in the world markets.
3. improves the standard of living of the peoples.
4. accelerating the economic development of underdeveloped
countries.
 BARRIERS OF FREE TRADE

. It has been argued that the trade barriers, like tariffs and quotas, only
encourage economic inefficiency, restrict commerce, and reduce the
general standard of living.
 BALANCE OF PAYMENTS
• In the process of international trade among countries of the
world, goods and services are being exchanged. Such exchanges
are being facilitated through the medium of international
payment system which is conducted mostly with the use of the
U.S. dollar.
• Transactions among countries do not involve only goods and
services but also loans and investments. Our large foreign debt
is an example of loans from other countries. The presence of
many multi-national corporations in our country is an example
of investments from other countries.
 BALANCE OF PAYMENTS
The balance of payments (BOP), also known as the balance
of international payments, is a statement of all transactions
made between entities in one country and the rest of the
world over a defined period, such as a quarter or a year. It
summarizes all transactions that a country's individuals,
companies, and government bodies complete with
individuals, companies, and government bodies outside the
country.
 BALANCE OF PAYMENTS
• The balance of payments includes both the current account and
capital account.
• The current account includes a nation's net trade in goods and
services, its net earnings on cross-border investments, and its
net transfer payments.
• The capital account consists of a nation's transactions in
financial instruments and central bank reserves.
• The sum of all transactions recorded in the balance of payments
should be zero; however, exchange rate fluctuations and
differences in accounting practices may hinder this in practice.
 COMPONENTS OF BALANCE OF
PAYMENTS
1. Current account. This includes exports and imports of goods and
services. Examples of goods are rice, sugar, corn, car, tractor, oil,
etc. In the case of services, these are tourism, education, insurance,
banking, transportation, etc.
2. Capital account. It is a record of all transactions relating to private
investment, grants and loans with other countries.
3. Official monetary reserves/Cash account. These are the assets of
the Central Bank in the form of gold reserves, international currency
reserves (like U.S. dollars, British pound, German mark, Swiss franc,
French franc, Japanese yen, and other acceptable international
currencies), and the Special Drawing Rights (SDRs).
 Understanding the Balance of Payments
(BOP)
• The balance of payments (BOP) transactions consist
of imports and exports of goods, services, and capital, as
well as transfer payments, such as foreign aid and
remittances. A country's balance of payments and its net
international investment position together constitute its
international accounts.
 Understanding the Balance of Payments
(BOP)
• The balance of payments divides transactions into two
accounts: the current account and the capital
account. Sometimes the capital account is called the
financial account, with a separate, usually very small,
capital account listed separately. The current account
includes transactions in goods, services, investment
income, and current transfers.
• Balance of payments and international investment position data are critical in
formulating national and international economic policy. Certain aspects of the
balance of payments data, such as payment imbalances and foreign direct
investment, are key issues that a nation's policymakers seek to address,

• While a nation's balance of payments necessarily zeroes out the current and
capital accounts, imbalances can and do appear between different countries'
current accounts.
• The U.S. had the world's largest current account deficit in 2022, at almost $972
billion. China had the world's largest surplus, at $402 billion.