Macroeconomics
Macroeconomics
5th Edition
ISBN: 9781319098759
Author: Paul Krugman, Robin Wells
Publisher: Worth Publishers
Question
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Chapter 18, Problem 3P
To determine

Concept Introduction:

Balance of Payment (BOP): It is an account of what is received by the residents of the country from the rest of world and what these residents have paid out to other countries on the account of the sale of goods, services and other invisible items as well as on the account of capital transfers from other countries. It is divided into two accounts.

Current Account: It maintains all the transactions related to the exchange of goods and services and unilateral transfers. It includes shipping insurance and banking services, investment income, foreign travel, transfer payments and balance of trade.

Financial Account: It provides details of all the capital transfers such as investment and loans between one country and the rest of the world. Some components are banking capital, official capital, private capital, gold and foreign capital.

Relation: In an economy, the sum of both current account and balance account is zero because they are balanced.

The relation between them is,

    CurrentAccountBalance+FinancialAccountBalance=0

Balance of Trade (BOT): It is a type of merchandise balance. It refers to the difference between the value of exports and imports. It highlights the visible trade transactions with the rest of the world for a given year. When the value of exports is more than its imports, the BOT is a surplus, but when the value of import is more than its exports, the BOT is a deficit and when both are equal, then it is balanced.

The formula to calculate the BOT is,

    BOT=VXVM

Here,

  • BOT is the balance of trade.
  • VXis the value of exports.
  • VM is the value of imports.

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