Balance of Payment

1. Meaning and Component of Balance of Payment
Balance of Payment is a systematic record of all international economic transactions of that country during the given period. Usually a year. Or is the device for recording all the economic transactions within the given period between the resident of one country and the rest of the world (the resident of the other country). Kind of the transactions entered to the balance of payment are – international transaction, constituting the transfer of asset and liabilities, the creation or the reduction of claim or the receipt and payment of fund, which take place between the resident of one country and those of other country.
And it refer to different between the total receipt and total payment of a country over period. Balance of payment include balance of trade and balance of payment is presented in two part –
- Current account
* Trade account or Merchandise = transaction of entering good.
* Invisible account = service account or transfer payment.
- Capital account
* Private capital account
* International institution capital
* Specie account

2. Equilibrium and Disequilibrium in the Balance of Payment
A. Equilibrium


Balance of Payment represent balance in current account, capital account will always be equal if receipt and payment are equal it is equilibrium state in international trade. If there any surplus or deficit is know as disequilibrium in international trade.
B. Measure to correct the Disequilibrium
- Trade measure
- Monetary measure
- Current devaluation
- Money contraction
- Exchange control
- Foreign loan
- Encouragement to foreign investment
- Incentive to foreign tourist
- Exchange clearing agreements
A causes of the disequilibrium in the balance of payment is –
- Cyclical fluctuation
- Huge development and investment programs in the developing economic
- Due to rapid economic development
- A vast increase in the domestic production of foodstuffs, raw material, substitute good. Etc.
- A huge population and high rate of birth in poor countries.
- demonstration effect
- International borrowing and investment
- Multi-trade transaction



3. Fixed Exchange Rate and Flexible Exchange Rate
- A case for fixed exchange rate are-
- Smooth flow of international trade
- Facilities international investment
- Necessary for currency area bloc
- Remove speculation
- A case against fixed exchange rate –
- Burden on domestic income and price
- No cost price relationship
- Not based on demand and supply force
- Equilibrium in balance of payment not possible
- A case for flexible exchange rate are –
- Its doesn’t hamper the foreign trade
- Natural rate of exchange in course of time
- No hinderance in the fluctuating of currency blocs
- Its protect the domestic economic
- Based on demand and supply forces
- long-term investment are not adversely effected
- A case against flexible exchange rate –
- Serious repercussion on country’s economic
- Unwarranted international capital movement
- Hinders long term foreign investment
- encouragement to speculation

4. Foreign trade multiplier with and without foreign repercussion and determination of national income and output
The concept of foreign trade multiplier seeks to gouge the effect of a change in a country’s in foreign trade on national income and employment. According to
Kindleberger it expresses the change in income caused by a change in exports or in investment in an open economy in which income spills over into imports.
- Foreign Repercussion
There can be foreign repercussion of significant change in income abroad due to the change in export and / or imports of a given home country, which causes a backwash effect on the foreign trade and national income of home country. If, however, home country is small in relation to the outside worlds, the foreign repercussion would be insignificant. For an increase in its imports will not be stimulating income abroad to a considerable extent. Obviously, the foreign repercussion would be very influencing nature in case of large economies. In case foreign repercussion more complex formulae are required to express the foreign trade multiplier and the relationships among saving and import propensities in the countries involved.