Commerce

Balance of Trade and Balance of Payments

Alfred Ajibola - Sat, 01st June, 2019 @ 11:03: AM

Topics in Commerce

Scheme of Work for Commerce, SS1, First Term Scheme of work for Commerce, SS1, Second Term Scheme of work for Commerce, SS1, Third Term Division of Labour and the Conditions necessary for it Forms, Advantages and Disadvantages of Division of Labour Balance of Trade and Balance of Payments Meaning and Types of Production Deferred payment and its benefits Commodity market explained Marketing Explained



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Balance of Trade and Balance of payments:

Your country does business with other countries. Nigeria as an instance does business with China. Lots of goods are imported into Nigeria from China. On the other hand, Nigeria is also a major exporter of oil to other countries of the world. Simply put; Balance of Trade deals with the import and export of goods only.

 

BALANCE OF TRADE

Balance of Trade can be defined as the total value of goods imported and exported by a country during a specific period; usually yearly or annually.

A country is said to have reached a balance of trade when the money generated from the exportation of goods equals that from the importation of goods.

Balance of trade can be either positivenegative or zero

  • A positive Balance of Trade implies that a country exports more goods than its imports. China as a country is very likely to have a positive balance of trade since it exports a variety of goods to other countries.
  • A negative Balance of Trade is sometimes considered as an unfavorable balance of trade since the country's importation exceeds its exportation. Nigeria is likely to have a negative balance of trade.
  • A zero Balance of Trade is reached when imports equal exports.

It is noteworthy that balance of trade has nothing to do with services. The import and export of services is NOT a concept of balance of trade.

 

BALANCE OF PAYMENTS

The idea behind the balance of payments is much broader than that of balance of trade. In fact, balance of trade is only one aspect of balance of payments. Other aspects or components of balance of payment are:

  • Balance of Services
  • Balance of Unilateral Transfers
  • Balance of payments on Current Account
  • Balance of payments on Financial Account
  • Balance of payments on Capital Account

By definition, Balance of Payments is the record showing the relationship between a country’s total payment made to other countries and the total money received by them from other countries within a time period.

The Balance of Payments is a guide that tells a country whether it has enough savings to pay for all its imports. It will also show the amount of economic output produced by a country.

A balance of payments can be on the surplus or deficit direction.

BALANCE OF PAYMENTS DEFICIT implies that a country imports more goods, services and capital compared to its exports. As a result, such countries will have to borrow from other countries, IMF (International Monetary Fund) or World Bank to pay for its imports. A continual balance of payment deficit will make a country a consumer nation. Such countries are likely to end up as debtors to other countries or international banks. This is not the ideal way to go for any country since their creditors may eventually seize their assets; and such asset could be the country’s natural resources.

Balance of Payment Deficit is also called Unfavorable Balance of Payments or Deficit Balance of Payments

Solutions to balance of payment deficit
  1. The country should implement the control of foreign exchange transaction.
  2. The country should devaluate its domestic currency.
  3. The country should establish industries that will produce similar goods which will act as substitutes for imported goods.
  4. The country should impose tariffs on importation of goods and services.
  5. They country can borrow from financial institutions like World Bank and IMF to support its domestic production.

 

BALANCE OF PAYMENTS SURPLUS means that the country exports more goods, services and capital when compared to its imports. This is the ideal way to go because such country will have enough capital to support its local or domestic production; simultaneously increasing job opportunities within it. The citizens of such countries are gainfully employed. These countries are generally lenders to other nations. Please read on production here.

Balance of Payments Surplus is also called Favorable Balance of Payments or Surplus Balance of Payments

 

Note the followings

Balance of payments for current account comprise of the receipts and payments for services. The services could be visible or invisible.

Balance of payments for capital account comprise of the capital that comes into and goes out of a country. It is simply capital inflow and outflow and can both be short term and long term. Capital movement in the form of investments and loans are all included here.

Balance of payments for Monetary Movement Account shows how the balances of both the current and capital accounts are settled.

 

Below are some differences between Balance of Trade and Balance of Payments

BALANCE OF TRADE

BALANCE OF PAYMENTS

It is the total value of goods imported and exported by a country during a specific period; usually yearly or annually

It  is the record showing the relationship between a country’s total payment made to other countries and the total money received by them from other countries within a time period

It helps a country evaluate its net profit and net loss incurred only from the importation and exportation of goods

It gives us a proper accountability beyond the importation and exportation of goods

Unilateral and capital transfers are not part of balance of trade

Unilateral and capital transfers are part of balance of payments

It deals with the difference between the export and import of goods only

It deals with the differences between the inflow and outflow of foreign exchange


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Alfred Ajibola is a Medical Biochemist, a passionate Academician with over 7 years of experience, a Versatile Writer, a Web Developer, a Cisco Certified Network Associate and a Cisco CyberOps Associate.


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Amazing facts in Commerce

Amazon is an e-commerce website launched in 1995. It did not make any profit for its first seven years.
Amazon's first profit was in 2003. Its founder "Jeff Bezos" is the richest man in the world as at 2018/2019


NOTABLE POINTS IN Commerce

Commerce can be defined as the exchange of goods and services, usually for money and on a large scale that will require the transportation of such goods and services.

Commerce is very important to the life of any Nation for the following reasons:

  1. Commerce facilitates the exchange of goods and services which everyone can enjoy, regardless their location or whether the goods is produced within or outside their country.
  2. Commerce creates an awareness of the existence of goods and services through advertising.
  3. Commerce offers employment to a very large number of people in a Nation.
  4. Commerce promotes rapid transfer of both oral and written messages through communication.
  5. Commerce determines the standard of living in a Nation. This is because the extent of commercial activities is crucial to wealth of  a nation.
  6. Commerce makes for the protection against risk in day to day business operations.
  7. Through commerce, there is a steady supply of goods in a Nation. This is because commerce ensures that goods produced are stored until needed.

A public company is not owned by an individual. Usually, it is owned by groups or a very large number of people.

The shares of a public company are traded freely on the stock exchange.

Below are some features of a public company

  1. A public company must receive it’s training certificate to commence business.
  2. The minimum membership is two while the maximum membership is limitless.
  3. A public company has a legal status. It can sue and be sued.
  4. A public company files and publishes its annual reports, including its accounts.
  5. The liability of its members is limited.
  6. The shares are easily transferrable through the stock market.
  7. A public company can issue debentures to be secured as its assets.

Please read on the types of business structure here

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