Balance of Trade: Theoretical Aspects

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Introduction

International trade across the world is occurring so extensively that the governments across the countries are very much concerned about the Balance of trade and the balance of payments situation. The balance of trade and the Balance of payment situation have a great influence on the government budget decision. An efficient and effective management of international trade can cause a revolutionary positive change in a country’s economic health. The condition of international trade of a country is reflected in the balance of trade and this balance of trade as being the largest part of the BOP has the greatest influence on a deficit or surplus BOP. Thus, the total discussion will be focused on the Balance of Trade and BOP will be discussed shortly.

Objective of the Report:

I. To discuss the theoretical aspects of the Balance of Trade and the Balance of Payment

II. To discuss the Balance of Trade and the Balance of Payment scenario of Bangladesh.

CHAPTER-1: Theoretical Aspects

Balance of Trade:

The balance of trade refers to the balance derived from the total exports subtracted by the total imports. It is the largest component of the Balance of payment of a country and this is the center piece of international trade. The BOT is positioned at the top row in the current account of the BOP.

The impacts of the surplus and deficit trade balance have different implications in different economic situations. A deficit trade balance is not always bad for an economy as this implies greater imports because during an expansionary economic situation import increase will create price competitions thus will reduce inflation. On the other hand a surplus BOT is very good in recessionary economic period as earnings from the export will help the economy to recover.

Balance of Payments:

The balance of payments is a statistical statement that systematically summarizes, for a specific time period, the economic transactions of an economy with the rest of the world. Transactions, for the most part between residents and nonresidents, consist of those involving goods, services, and income; those involving financial claims on, and liabilities to, the rest of the world; and those (such as gifts) classified as transfers, which involve offsetting entries to balance—in an accounting sense—one-sided transactions.

A BOP generally looks like as follow:

| |BOP for the Period x to y | |Item |Debit |Credit | |1. Current Account | | | |Goods and services | | | |Income | | | |Current Transfers | | | |2. Capital and Financial Account | | | |Capital account | | | |Financial Account | | | |Other Investments | | | |3. Official Reserve | | | |4. Net Errors and Omissions. | | |

In this figure we can see that the BOP is comprised of the Current Account, The Capital and Financial Account, Other investments, Reserve assets and the Net Errors and Omissions.

The Current Account: Current account is comprised of all transactions (other than those in financial...
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