Thursday, 19 May 2011

Distinguish Balance of trade and the Balance of Payment and what are the causes of unfavorable Balance of payment also suggest measures which can be a

Balance of trade is the difference between the value of exports and imports of visible goods of a country during a given period of time. If a value of visible items exports exceeds than the value of visible goods imports then the balance of trade is said to be favorable.

Balance of payment is a record of economic transaction between the residents of the one country and the rest of the world during the period of one year. The main items which are included in the balance of payment are following :

1. Current Account :-
It is composed of imports and exports of visible goods.

2. Services :-
Services such as transport, insurance and the services of labour.

3. Donation :-
Pensions and grants are also included.

If the total receipts of visible and invisible items of balance of payments exceed the value of visible a and invisible payments is said to be surplus of favorable. On the other hand if there is an opposite situation then the balance of payment will be called unfavorable.


Following are the main causes

1. Import of Capital goods :-
Developing countries are importing capital goods to industrialist the economy while their exports mainly depends upon raw material and semi manufactured goods. Due to this their balance of payment remains unfavorable.

2. Deterioration in terms of Trade :-
In Pakistan the import unit values are higher than the value of exports. A decline in terms of trade causes imbalance in the balance of trade.

3. Higher payments for Foreign Services :-
Various services like transport, insurance and experts have to pay a huge amount of foreign exchange every year. So it becomes the cause of unfavorable balance of payment.

4. Dependence on Agriculture :-
Many countries like Pakistan mainly rely on the exports of primary commodities like rice and cotton. If the nature is kind then per acre yield increases, on the other hand production decreases which affects the exports and balance of payment remains unfavorable.

5. Political Uncertainty :-
Many less developing countries like Pakistan are facing political uncertainty which is the manic cause of low production. Ultimately balance of payment remains unfavorable.

6. Domestic Problem :-
Pakistan is facing many problems like Afghan refugees lack of capital and public unrest. Due to these reasons balance of payment remains unfavorable.

7. International Factors :-
In the world market prices of primary commodities are very low while the prices of manufactured goods, and capital goods are high. This trend of prices has affected adversely the balance of payment of the less developing countries.

8. Devaluation :-
In 1972 Pakistan devalued its currency up to 131 %. This devaluation also increased the deficit in the balance of payment.

9. De linking of Dollar :-
Further de linking of dollar has also increased deficit of balance of payment.

10. Re-payment of Debt and Interest :-
The less developing countries are also paying the interest of the debt and it is great burden which influences the balance of payment.

11. Consumption Oriented Society :-
The residents of less developing countries feel proud to import the consumer goods from abroad while these can be easily manufactured inside the country.

12. Import of Oil and Fertilizer :-
These items have also increased the deficit in the balance of payment.


1. Utilization of Resources :-
If the less developing countries like Pakistan utilize the resources of the country, it can increases the production and exports.

2. Promotion of Labour Intensive Industries :-
Pakistan should give priority to the labour intensive industries because it is cheap as compared to the machines. So we can reduce the import of machines by utilizing the surplus labour.

3. Change in the Export Pattern :-
Since independence we are exporting the raw material and few primary commodities. Now if we want to make the balance of payment favorable then we will have to increase the exports manufactured goods instead of raw material.

4. Increase in Small Scale Industry :-
We should establish small scale industry like Korea, Taiwan and Hong kong. We can increase our exports if we improve our Carpet, Sports and Leather industry.

5. Decreases in Consumption :-
The consumption goods may not be imported and people should use the local manufactured goods.

6. Denationalization :-
All the sick and nationalized industries should be handed over the private sectors to improve the production of the country.

7. Reduction in Export Duties :-
The government should reduce the export duties and various types of incentive should be given to the exports. The quality of the exports must be improved the compete.

8. Revision in Import and Export Policy :-
The government should frame such type of import and export policy that it should encourage the imports.

9. Utilization if Foreign Aid :-
Foreign aid should be used only for the productive prospects and a country should rely maximum on the domestic resources.

Sometimes devaluation policy is also adopted to correct the balance of payment.


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