Balance of Trade, Term of Trade, Balance of Payments and Others

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Welcome to class!

In today’s class, we will be talking about the balance of trade, the term of trade, the balance of payments and others. Enjoy the class!

Balance of Trade, Term of Trade, Balance of Payments and Others

CONTENTS

1. Terms of trade, Balance of Trade, Balance of Payments
2. Tools of trade restriction
3. Measures for promoting exports

Terms of Trade: This is the relationship between the prices of a country’s exports and prices of her imports.

Favourable Terms of Trade: This occurs when a country’s export has higher prices than the prices of her imports.

Unfavourable Terms of Trade: This is the situation when a country’s exports have lower prices than the prices of her imports.

Terms of Trade        =         (Price index of Exports/Price Index of Imports)  x 100

Balance of Trade: This shows the relationship between the total value of a country’s visible exports (i.e. her receipts from visible exports) and that of her visible imports (i.e. her payments for visible imports) during a given period, usually one year. It can be favourable when exports exceed imports or unfavourable when imports are greater than exports.

Balance of payments: It is an annual statement of all payments made to other countries and total receipts from those countries. It is a comprehensive statement of income and expenditure on international account for one financial year.

The balance of payment is made up of three main accounts:

• Current Account
• Capital Account
• Monetary Movement Account

Free trade: Free trade means non – restriction of foreign trade. It is a situation where buying and selling take place between different countries without restrictions or impositions of artificial barriers e.g. tariffs.

Tools of trade restriction

(Measures of restrict imports or measures used to conserve foreign exchange)

1. Tariffs or imports duties
2. Devaluation of the domestic currency i.e. lowering the value of a country’s currency concerning others. If this is done, imports become costly while exports will be cheaper
3. Embargo – i.e. prohibition or outright ban placed on some imported goods
4. Import / Export Quotas – the imposition of limits on the number of goods that can be imported or exported.
5. Foreign Exchange Control – Imports can be discouraged by making it difficult to obtain foreign exchange to pay for foreign goods. This is done by strictly controlling the availability of foreign exchange required for foreign trade transactions.
6. Import license: This is a permit that allows goods to be imported. It is used to limit the persons who can import certain goods and the quantities those people can import.

Tariffs

Tariffs are taxes imposed on imported goods either as a percentage of their value (Ad Valorem Duty) or on the amount or quantity (i.e. units) of goods imported (Specific Duty).

The idea of tariffs is to reduce the amount of trade. A tariff is also referred to as import duty.

Purposes for which tariffs are imposed or (reasons for the imposition of tariffs or why countries impose restrictions on foreign trade)

1. To protect infant industries
2. To raise revenue for the government
3. As a retaliatory measure
4. To prevent dumping of goods from foreign countries
5. To correct balance of payments deficits
6. For political motives. Tariffs can be introduced as a discriminatory measure against unfriendly countries
7. To influence or control consumption patterns in the economy
8. To prevent importation of dangerous goods e.g. cigarettes, alcohols
9. Protection and preservation of cultural natural heritage e.g. wildlife, artefacts.
10. To encourage local production of goods thereby generating employment opportunities

 Evaluation

1. Define the following A. Tariffs          B.  Dumping
2. State five advantages of free trade

Unfavourable balance of payments

An unfavourable balance of payments means that a country’s expenditure (payments) on visible and invisible imports is greater than her income (or receipts) from visible and invisible exports. It can be referred to as an adverse balance or deficit balance.

Correcting an adverse balance of payments

An unfavourable or deficit balance of payments may be corrected by the following measures:

1. The imposition of tariffs – this will reduce the importation of goods
2. Devaluation of the domestic currency i.e. Naira
3. Exchange control regulations i.e. control of foreign exchange transactions
4. Increasing exports by establishment and promotion of import – substitution industries
5. Borrowing from international financial institutions e.g. I.M.F.
6. Sale of foreign investments and assets
7. Increase in domestic production of goods

Measures for promoting exports

The government of a country can promote exports through the following methods:

1. Giving subsidies to export-related industries to reduce their cost of production
2. By the reduction of export duties
3. Establishment of export promotion agencies like Export Credit Guarantee Scheme, Commodities Boards etc
4. Devaluation of the domestic currency – this will make exports cheaper
5. By giving tax incentives to export-related industries
6. Creation of Export Processing Free Zones – EPFZ are industrial areas provided with adequate infrastructures to produce mainly for export
7. Provision of credit facilities to exporters
8. Promotion of exports through trade fairs and exhibitions of homemade goods in foreign countries
9. The government can simplify export procedures and documentation
10. Reduction in freight rate

Evaluation

1. Explain the meaning of the term “favourable balance of payments”
2. Explain five methods that can be used to correct an adverse balance of payments

Reading assignment

Essential Commerce for SSS by O.A. Longe Page 44 – 53

Comprehensive Commerce for SSS by J.U. Anyaele Page 117 – 137

General evaluation

1. List five features of multiple shops
2. Give any five reasons why small scale retailing is common in Nigeria
3. State any five channels of distribution for consumer goods
4. Explain five factors to be considered before choosing a particular channel of distribution
5. Outline five services rendered by the wholesaler to the manufacturer

Theory

1. State four measures used to restrict imports.
2. State three reasons for the imposition of the tariff.

 

In our next class, we will be talking about Foreign Trade – Structure and Procedures. We hope you enjoyed the class.

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