IB Activities

Topics: International economics, Macroeconomics, Current account Pages: 11 (2070 words) Published: December 22, 2013
Bangladeshi Aspect of Trade Balance
and Balance of Payment
Submitted by

Md. Tahmidul Haq Ansari
abir_ansari@yahoo.com

1

Md. Tahmidul Haq Ansari

Introduction
In an open economy, one country trades with another. The country which exports (goods and services) more than it imports has a trade surplus. Whatever a country is carrying, a trade surplus or a trade deficit, does not matter rather what matters is the sustainability of surplus or deficit in the long run. Nothing can continue for long and a reversion is always expected for that reason. Basically, trade balance (deficit or surplus), is a function of several macroeconomic variables, including savings and investments. The country which saves more than its investments would have a trade surplus and vice versa. Bangladesh stands in the vice versa zone, i.e. gross domestic savings is lower than the investments. Our domestic savings are not adequate to meet the investments demand. Hence, capital inflow from trade surplus foreign countries fills the gap of the two, and that capital inflow forms the figure of capital account, the second broad terms of Balance of Payments (BOP). The relationship between current account and capital account is a well established equation, net exports (exports-imports)=savings-investments. This equation will always be true (identity). With this identity, we can explain the changes in trade balance. A change in net exports can be explained by a change either in national savings or in the level of investment, or both. For example, if the level of savings falls say because of an expanding government budget deficit - then, all else being equal, net exports will fall (that is, an existing trade deficit will expand). The same result will occur if, all else being equal, investment rises. In both cases, more capital must be attracted from abroad to fill the expanding gap between savings and investment. If investment falls while savings remains fixed, then net exports will rise (that is, an existing trade deficit will shrink).

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Md. Tahmidul Haq Ansari

Theoretical Aspect
Balance of Trade. The balance of trade is the difference between the monetary value of exports and imports in an economy over a certain period of time. A positive balance of trade is known as a trade surplus and consists of exporting more than is imported; a negative balance of trade is known as a trade deficit or, informally, a trade gap.

The balance of trade forms part of the current account, which also includes other transactions such as income from the international investment position as well as international aid. If the current account is in surplus, the country's net international asset position increases correspondingly. Equally, a deficit decreases the net international asset position.

The Balance of Trade is identical to the difference between a country's output and its domestic demand - the difference between what goods a country produces and how many goods it buys from abroad; this does not include money respent on foreign stocks, nor does it factor the concept of importing goods to produce for the domestic market.

Balance of Payment. A record of all transactions made between one particular country and all other countries during a specified period of time. BOP compares the dollar difference of the amount of exports and imports, including all financial exports and imports. A negative balance of payments means that more money is flowing out of the country than coming in, and vice versa. Balance of payments may be used as an indicator of economic and political stability. For example, if a country has a consistently positive BOP, this could mean that there is significant foreign investment within that country. It may also mean that the country does not export much of its currency. This is just another economic indicator of a country's relative value and, along with all other indicators, should be used with caution. The BOP includes the trade balance,...
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