BALANCE OF PAYMENT.

 A.          The meaning of some terms

     I.          Stabilization Policies

Economic stabilization policies are macroeconomic policies implemented by the government and Central banks in attempt to keep economic growth stable and less volatile. Policy makers are carefully monitor the business cycles and make adjustments to fiscal and monetary policy in an attempt to create stable and sustainable growth and reduce the damage caused by downturns in the business cycle.

  II.          Capital account/ Financial account;

This is the national account that shows the net change in asset ownership for a nation. It is the net result of the Public and private international investment following in and out of the Country.

It may also refer to an account showing the net worth of the business at a specific point in time. Examples of capital account are bonds and shares. Capital account is the part of the balance of payments recording a nation inflow and outflow of financial securities. In macroeconomics and international and financial capital account is one of two primary components of the balance of payments, the other being the current account. The capital account reflects net change in ownership of national assets.

III.          Balance of Payment (BOP);

Balance of payment of the country is a systematic record of transactions between the residents of the country and the rest of the world in a particular period commonly over a year. These transactions are made by individual, firms and government bodies.  The balance of payments includes all external visible and non visible transactions of a country during a given period of time usually one year.

Balance of payment is deficit if import is greater than export, balance of payment is surplus if export exceeds import and balance of payment is equilibrium if import is equal to export. Generally if export is greater than import it shows that the economy of the country is strong and if import is  greater than export it show that the economy of the country is weak.

IV.          The current account;

Refers to the records of current flows of funds into and out of the country including imports and exports of goods and services, net income earned by residents, from foreign assets and net transfer payment from abroad. (McEachern A, W 2009)

It is the record of the country’s receipts and payment on both visible and invisible exports and imports. It deals with current transactions which involves sales and purchases of goods and services.

The current account measures the country’s trade in currently produced goods and services along with unilateral transfer between countries. It is divided into three separate components

·       Net export of goods and services

·       Net income from abroad

·       Net unilateral transfer

    V.          Terms of Trade;

Refers to the rate at which ones country products (exports) exchanges against those of other countries (imports). It measure how much of import the country’s receives from the exports.

This is the quantity of foreign goods that can be obtained in exchange for one domestic goods and services, also known as real exchange rate.

Mathematically TOT  = Px/ Pm X 100%

                                                Where by;

                                                                   TOT – Terms of Trade

                                                                      Px – Price of export

                                                                     Pm  - Price of import

·       It is good for the country in a sense that its citizen are able to obtain more foreign goods  and services in exchange for a given amount of domestic production.

·       Generally is that the higher the real exchange rate is the lower the country’s net export will be holding constant other factors affecting export and import demand.

The term of trade can be Favorable, unfavorable and balanced.

B.          Disequilibrium balance of payment;

            This happen when the expenditure on visible and invisible import capital outflow exceeds the revenue from visible and invisible export and capital inflow.

The causes of disequilibrium balance of payment

Natural calamities; when this happen in a country there is a different natural calamity like earthquake, soil erosion, tsunami and drought which makes people from that country not able to produce goods and services due to unfavorable conditions. Therefore this will lead the country to depend more on imports while not exporting.

Lack of Protectionism; Sometimes the country may decide to put some restrictions on the inflow of goods to be imported and exported, therefore for the country that have some trade restrictions may tend to have favorable balance of payment than the country that has no restrictions on import and exports of goods and services. For example Tariffs and quotas,

Development schemes; the main reason for adverse balance of payments in the developing countries is the huge investment in schemes, in these countries. The propensity to import of the developing countries increases for want of capital for industrialization. The exports on other hands may not increase because these countries traditionally are the primary producing countries, Moreover the volume of exports may fall because newly created domestic industry may need them.

Price - cost structure change; The price cost structure of export industries affect the volume of exports and create disequilibrium in the balance of payment. Increase in price due to high wages, higher cost of raw materials reduces export and make the balance of payment unfavorable.

Fall in export demand; There has been a considerable decline the export demand for primary goods for the under developed countries as the result of the large increase in the domestic production of food stuff, raw material and substitutes in the rich countries. Similarly the developed countries also fund a fall in their exports demand because the loose of colonial market, there the deficit balance of payment is higher in developing countries than in developed countries.

Demonstration effects; The people in LDC’s tend to follow the consumption patterns of Developed countries. As a result of these demonstrations effects the imports of the LDC’s will increase and creates disequilibrium balance of payments.

Political factor; When there is political instability in a country, production declines and lead to decrease in exports while increasing importation hence disequilibrium in balance of payment. Examples of political instabilities are like civil wars which make country fail to produce or produce less hence depending much on imports.

Population explosion; another reason for adverse balance of payments in the poor countries is population explosion. Rapid growth of population in countries leads to the demand of commodities to  exceed the supply, this situation forces the country to import more goods and services to so as to fix the deficit within the country , therefore it cause the disequilibrium in balance of payment because the imports become greater than the exports.

Poor science and technology; This is also among the factors that cause disequilibrium in balance of payment, due to the fact when the country has low technology in production then the commodity from that country will be of low quality compared to the country which uses advanced technology. So because of this the country with low technology will depend much on imports hence lead to disequilibrium in balance of payment