Thursday, 28 July 2011

Distinguish or Difference between balance of trade and balance of payment and what are the causes of unfavorable balance of payment of poor countries

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

Balance of Payment :-
Balance of Payment is a record of economic transaction between residents of the one country and the rest of the world during the period of one year. Under balance of payment we include visible as well as invisible goods.

Favorable Balance of Payment :-
If the total value of imported goods and services exceeds than the total value of exported goods and services during a year the balance of payment is said to be unfavorable. In case of opposite situation it will be unfavorable.

Most of developing countries balance of payment condition is not satisfactory. Accept few years they facing deficit in their balance of payment. The deficit is met by the loans. The deficit is increasing day by day.

1. Import of Machinery :-
Developing countries are importing machines and technology to improve the industrial; sector. It has made the balance of payment unfavorable because the value of capital goods is increasing day by day and we want to industrialize our economy.

2. Export of Raw Material :-
Exports of developing countries depend upon raw material and semi manufactured goods. The prices of raw material are very low in the world market. So poor countries balance of payment remains unfavorable. For instance the product of cotton reduced in Pakistan in 1995 due to virus so it also affected adversely in balance of payment because Pakistan imported cotton instead of exporting.

3. Dependence on Agriculture :-
Many countries like India, Pakistan, Bangladesh and other developing countries mainly rely on exports of primary goods like rice and cotton. If climate is unfavorable then production of agriculture sector decreases which affects the balance of payment badly.

4. Payment for Foreign Services :-
Every year most of underdeveloped countries pays a lot of foreign exchange for various services like transport, Insurance and Experts. It makes their balance of payment unfavorable.

5. Increase in the Sick Industrial Units :-
In some developing countries due to nationalization a number of units are suffering a loss. These units are not producing goods according to their full capacity. The low production has reduced the exports and increased the deficit of the budget.

6. Unfavorable Terms of Trade :-
Poor countries are paying higher prices of imports as compared to the prices at which it gets from exports.

7. Poor Performance of Public Sector :-
The performance of public sector industries is also not satisfactory in developing countries. it waste lot of foreign exchange of the country.

8. Political Unrest :-
many less developed countries are facing political unrest which is the main cause of low production. Ultimately balance of payment remains unfavorable. In this situation investor fears to do the investment.

9. Advanced Countries Policies :-
The import policy of advanced countries is not favorable for the poor countries. They impose restrictions on the imports and create problems for the poor countries. They have also created unions against developing countries.

10. Import of Oil and Fertilizer :-
Developing countries are spending a lot of foreign exchange every year on the import of oil and fertilizer. It has increased the deficit in the balance of payment.

11. Import of Wheat :-
Poor countries are facing the food shortage problem and spending a huge amount of foreign exchange on its import.

12. Import of Consumption Goods :-
The people of less developed countries prefer to consume the imported goods. Even people are not ready to wear their on country cloth. This attitude has increased the imports. Cosmetics and basic consumption goods are even imported.


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