TERMS OF TRADE

 Balance Of Payment
 Disequilibrium
 Corrective Measures
A country has to deal with other
countries in respect of the following

 Visible items which include all types of physical

goods exported and imported.
 Invisible items which include all those services

whose export and import are not visible. e.g. transport

services, medical services etc.
 Capital transfers which are concerned with capital

receipts and capital payment.

 Balance Of Payment
Meaning: The balance of payment of a country is a
systematic record of all its economic transactions with the
outside world in a given year.
also known as balance of international payments and
abbreviated B.O.P. or BoP
It is a statistical record of the character and dimensions of
the country’s economic relationships with the rest of the
world
 Definitions:-
“ BoP is a statement or record of all monetary and economic transactions
made between a country and the rest of the world within a defined period
(every quarter or year). These records include transactions made by
individuals, companies and the government ”

According to Bo Sonderster,
“The balance of payments is merely a way of listing receipts and payments
in international transactions for a country”
B.J Cohen
“it show the country’s trading position, changes in its net position as foreign
lender or borrower, and changes in its official reserve holding”
Features
 It is a systematic record of all economic transactions
between one country and the rest of the world.
 It includes all transactions, visible as well as

invisible.
 It relates to a period of time. Generally, it is an annual

statement.
 It adopts a double-entry book-keeping system. It has

two sides: credit side and debit side. Receipts are

recorded on the credit side and payments on the debit
side.
Balance of Trade
 The difference between a country's imports and its
exports.
 Balance of trade is the largest component of a
country's balance of payments.
 Debit items include imports, foreign aid, domestic
spending abroad and domestic investments abroad.
 Credit items include exports, foreign spending in
the domestic economy and foreign investments in
the domestic economy.
 When exports are greater than imports than the
BOT is favourable and if imports are greater than
exports then it is unfavourable
Balance of Trade V/s Balance of Payment

 The Balance of Payment takes into account all the

transaction with the rest of the worlds

 The Balance of Trade takes into account all the

trade transaction with the rest of the worlds
Structure of Balance of Payments Account

 Constructed on the principle of double entry book keeping.

 Each transaction is entered in the credit and debit side of the
balance sheet. The BoP should be zero. The current account must
balance with the combined capital and financial accounts
 It differs from business accounting in one aspect.
 In business accounting,
◦ Debits - left side of the balance sheet.
◦ Credits - right side of the balance sheet.
 But in bop accounting,
◦ Credits - left side
◦ Debits - right side
 payment received is a credit transaction
 payment to a foreign country is a debit transaction.
Items on the credit side Items of debit side
(received from foreign Country ) (payment to a foreign country)
 Exports of goods and services, • Imports of goods and service,
 un requited ( or transfer) receipts transfer (or un requited) payments
in the form of gifts, grants etc. to foreigners as gifts, grants etc.
from foreigners, • Lending to foreign countries,
 borrowings from abroad, • investments by residents to
 investments by foreigners in the foreign countries, and
country, and • official purchase of reserve assets
 official sale of reserve assets or gold from foreign countries and
including gold to foreign international agencies.
countries and international
agencies.
 Balance-of-payments accounts are divided into three
main sections:
 The Current Account
 The Capital Account
 The Financial Account
 The Current Account

 The current account monitors the flow of funds from goods and
services trade (import and export) between countries.
 Now this includes money received or spent on manufactured goods
and raw materials.
 It also includes revenue from tourism, transportation receipts,
revenue from specialized services (medicine, law, engineering), and
 royalties from patents and copyrights. In addition, the current
account includes revenue from stocks.
 Records transactions that pertain to three categories
◦ First category:- Goods (export or import of physical goods)
(Eg. Agricultural foodstuffs, autos, computers, chemicals).
◦ Second category:- Services
(Eg. Intangible products like banking and insurance services).
◦ Third category:- Income receipts and payments
Income from foreign investments and payments that have to be
made to foreigners investing in a country.

 A current account deficit occurs when a country imports more goods,

services, and income than it exports.

 A current account surplus occurs when a country exports more goods,

services, and income than it imports
The capital account
 The capital account monitors the flow of international capital transactions.
 These transactions include the purchase or disposal of non-financial assets
(for example, land) and non-produced assets.
 The capital account also includes money received from debt-forgiveness
and gift taxes.
 In addition, the capital account records the flow of the financial assets by
migrants leaving or entering a country and the transfer, sale, or purchase
of fixed assets.
 Records one-time changes in the stock of assets.
 Until recently this item was included in the current account.
 The capital account includes capital transfers, such as
◦ debt forgiveness and
◦ migrants' transfers (the goods and financial assets that accompany migrants as they
enter or leave the country)
 The Financial Account
 The financial account monitors the flow of funds pertaining to
investments in businesses, real estate, and stocks.
 It also includes government-owned assets such as gold and
Special Drawing Rights (SDRs) held with the International
Monetary Fund (IMF).
 In addition, it includes foreign investments and assets held
abroad by nationals.
 Similarly, the financial account includes a record of the assets
owned by foreign nationals.(Formerly the capital account)
records transactions that involve the purchase or sale of assets.
 When capital flows out of the domestic country, it enters the
capital account as a debit.
 Disequilibrium In The Balance Of Payments

 A Surplus in the BOP occurs when Total Receipts exceeds

Total Payments.
 BOP= CREDIT>DEBIT ( Favourable )

 A Deficit in the BOP occurs when Total Payments exceeds

Total Receipts.
 BOP= CREDIT<DEBIT ( Non- Favourable )
 Importance of Balance Of Payments
1. BOP records all the transactions that create demand for and supply of a
currency. (appreciating or depreciating in comparison with other )
2. provides a clear picture of the economic relations between different
countries. 
3. an integral aspect of international financial management. Judge economic
and financial status of a country in the short-term
4. BOP may confirm trend in economy’s international trade and exchange
rate of the currency. This may also indicate change or reversal in the trend.
5. This may indicate policy shift of the monetary authority (RBI) of the
country.
6. Country’s BoP determines its potential as a constructive economic partner.
7. In addition, a country’s BoP indicates its position in international economic
growth..
Causes of Disequilibrium In The Bop
 Cyclical fluctuations
 Short fall in the exports
 Economic Development
 Rapid increase in population
 Structural Changes
 Natural Calamites
 International Capital Movements
Measures To Correct Disequilibrium in the
BOP

1. Monetary Measures 2. Non- Monetary measures

a) Monetary Policy
b) Import Substitutes
b) Fiscal policy

c) Exchange Rate Depreciation

a) Export Promotion
d) Devaluation

e) Deflation
c) Import Control (Tariffs, Quotas)
f) Exchange Control
 Monetary Measures

a) Monetary Policy:-
The monetary policy is concerned with money supply and credit in the
economy.
It is the policy adopted by the monetary authority of a country that
controls either the interest rate payable on very short-term borrowing or
the money supply, often targeting inflation or the interest rate to ensure
price stability and general trust in the currency.

 Open Market Operations (OMO)

 Cash Reserve Ration (CRR)
 Statutory Liquidity Ratio (SLR)
 Liquidity Adjustment Facility (LAF)
 Selective Credit Control
 Moral Suasion
b) Fiscal Policy
Fiscal policy deals with the taxation and expenditure decisions of
the government.
Its a Govt.'s policy on income and expenditure.
Govt. incurs development and non - development expenditure,.
It gets income through taxation and non - tax sources.
Some of the major instruments of fiscal policy are as follows:
Budget, Taxation, Public Expenditure, public revenue, Public Debt,
and Fiscal Deficit in the economy.

There are three types of fiscal policy:

neutral policy,
expansionary policy,and
contractionary policy. 
c) Exchange Rate Depreciation
By reducing the value of the domestic currency, government can correct
the disequilibrium in the BOP in the economy.
Exchange rate depreciation reduces the value of home currency in relation
to foreign currency.
As a result, import becomes costlier and export become cheaper. It also
leads to inflationary trends in the country,

d) Devaluation
It is lowering the exchange value of the official currency. When a country
devalues its currency, exports becomes cheaper and imports become expensive
which causes a reduction in the BOP deficit.

Devaluation is the deliberate downward adjustment of the value of a

country's money relative to another currency, group of currencies, or
currency standard.
 e) Deflation:-
Deflation is the reduction in the quantity of money to reduce prices and incomes.
Deflation is a general decline in prices for goods and services, typically
associated with a contraction in the supply of money
In the domestic market, when the currency is deflated, there is a decrease in the
income of the people.
This puts curb on consumption and government can increase exports and earn
more foreign exchange.

 f) Exchange Control:-
All exporters are directed by the monetary authority to surrender their foreign
exchange earnings, and the total available foreign exchange is rationed among the
licensed importers.
Government-imposed limitations on the purchase and/or sale of currencies.
These controls allow countries to better stabilize their economies by limiting in-
flows and out-flows of currency, which can create exchange rate volatility
The license-holder can import any good but amount if fixed by monetary
authority
 II. Non- Monetary measures
 a) Export Promotion
For export promotions the country may adopt measures to
stimulate exports like:
◦ export duties may be reduced to boost exports
◦ cash assistance, subsidies can be given to exporters to increase
exports
◦ goods meant for exports can be exempted from all types of taxes.
 b) Import Substitutes
Steps may be taken to encourage the production of import substitutes.
This will save foreign exchange in the short run by replacing the use
of imports by these import substitutes.
 c) Import Control
Import may be kept in check through the adoption of a wide
variety of measures like quotas and tariffs.
◦ 1. Quotas – Under the quota system, the government may fix and
permit the maximum quantity or value of a commodity to be
imported during a given period. By restricting imports through the
quota system, the deficit is reduced and the balance of payments
position is improved.
◦ 2. Tariffs – Tariffs are duties (taxes) imposed on imports. When
tariffs are imposed, the prices of imports would increase to the
extent of tariff. The increased prices will reduced the demand for
imported goods and at the same time induce domestic producers to
produce more of import substitutes
Foreign Trade In India –
The Journey

Before 1947 1952-53 to 1956-57 1975-76

Before 1947
 Regulation in foreign trade
 Aim -
 Conservation of scarce foreign
reserve
 Self-Reliance by production
 Import Reduction and Export
Promotion
Phase 1 (1947-48)

Restriction Import and

Export

Continuation of wartime
trade

Blocked account

Led to depreciation of rupee

in 1949
Phase 2 (1952-53 to 56-57)
 Liberalisation of FT adopted
 Aimed for development of Trade policy
 Exports – Encouraged
(Reduced Controls and duties, reformed export quota,
increased export incentives, simplifying export licences)
 Results:-
◦ Exports not shows any much increase
◦ Considerable increase in imports
◦ Exchange reserve reduced
 Policy have to reversed
 Phase 3 (1956-57 to 75-76)
Planned to meet requirements for economic development

Restriction over Imports

Very restrictive methods used
Import Control methods used
Reduced the list of importable
goods

Encouraged Exports
Energetic export promotion was
started
To solve BOP Problem
Focused both traditional and new
products
Import substitute industries
 Phase 4 (1975-76)
 After the depreciation of Rupee value in 1966
 BOP Account again reduced
 Mudaliyar Committee
◦ Allocation of raw material for export oriented industries
◦ Income tax relief on export earnings
◦ Export promotion
◦ Removal of disincentives
 Establishment of Export Promotion Advisory Council and
Ministry of International Trade
 Followed Import Liberalisation and export promotion for 1985
 1985 changed based on Abid Hussain Committee
Phase 5 (1991 Onwards)
 Strong trade policy
 Economic reform and Liberalisation adopted in 1991
 New Trade Policy 1991
 Reduced control
 Decontrolling of licence
 Result: Created a change in the nature and volume of
exports and imports
 Changes in industrialisation and foreign investment
policy.
Organisation For Export Promotion In India

The export Inspection ●

(Quality and pre-shipment inspection)
Council

The Indian institute of ●

(Training – research, market survey)
foreign trade

The Indian institute of ●

(Research and training on Raw material for
packaging packaging)

Export Advisory ●
(Advisory and execute functions under the
Council ministry of commerce)

Commodity Boards ●
(Spices, coir, tea etc.)
Thank you