What is Trade? Types of Trade - Methods of correcting the BOP deficits

What is Trade? Types of Trade - Methods of correcting the BOP deficits

What is Trade?

Trade is involves the buying and selling of goods or commodities.

What is Trade

What is International Trade?

When trade takes place between the residents of two different countries, it is known as international trade.

Basis of International Trade:

The basis of international trade is territorial division of labour or international specialization. Just as an individual can’t produce all the commodities he needs, similarly it is also not possible for a country to produce all the commodities it requires. Just as different individuals have different abilities to produce different commodities, in the same way different countries have also different degrees of efficiency to produce different commodities. There lies the necessity of international trade.

What is Domestic Trade?

When trade takes place between the residents of the same country, it is known as Domestic Trade.

What is Balance of Payment Accounts?

The balance of payments account is a systematic record of all economic transactions during a period of time between the residents of the reporting country and the residents of the rest of the world. Balance of payments or BOP has two sides – Credit and Debit sides.

The BOP account is prepared in such a manner that the sum of all the credit items is always equal to the sum of all the debit items. This is due to the nature of the double entry system of accounting used in preparing the BOP account.

Balance of Payment (BOP) = Current Account Balance + Capital Account Balance.

What is Balance of Trade?

The difference between the value of visible exports and the value of visible imports is called the Balance of Trade.

What is Balance of Services?

The difference between the value of invisible exports and the value of invisible imports is called the Balance of Services.

What is Unrequited or transfer Receipts?

Gifts etc. received from foreigners is called unrequited or transfer receipts.

What is Unrequited or transfer payment?

Gifts etc. made to foreigners is called unrequited or transfer payment.

What is Balance of Unrequited Transfers?

The difference between unrequited receipts and unrequited payments is called the Balance of Unrequited Transfers.

What is Capital Receipts?

Loans from foreigners, repayment of loans by foreigners, sale of assets to foreigners etc. are called Capital Receipts.

What is Capital Payments?

Loans to foreigners, capital repayments for purchase of assets from foreigners etc. are called Capital Payments.

What is Balance of Current Account?

Balance of Current Account = { ( Visible exports + Invisible exports + Unrequited Receipts ) – ( Visible imports + Invisible imports + Unrequited Payment ) }

What is Balance of Capital Account?

The difference between Capital Receipts and Capital Payments is called Balance of Capital Account.

What are the Methods of correcting the BOP deficits?

1. Expansion of Export: The measures that are taken to increase the exports are as follows –

a)      Through bilateral trade agreements.

b)      Through advertisements in foreign countries.

c)       Through organization of trade fairs in foreign countries.

d)      Through reduction in cost of production of exports.

e)      Through reduction in export duties on specific commodities.

f)       Through implementation of duty – drawbacks or subsidies.

2. Control of Imports: The measures that are taken to control the imports are as follows –

a)      Through imposition of import quotas.

b)      Through imposition of import duties.

c)       Through control of rate of exchange.

d)      Through direct Government intervention.

e)      Through deflation.

      Apart from these above measures, a country’s BOP deficits can be corrected through short term loans from International Monetary Fund or IMF.