BALANCE OF TRADE AND BALANCE OF PAYMENTS

Before we look at these forces, we should sketch out how exchange rate movements affect a nation 's trading relationships with other nations. A higher currency makes a country 's exports more expensive and imports cheaper in foreign markets; a lower currency makes a country 's exports cheaper and its imports more expensive in foreign markets. A higher exchange rate can be expected to lower the country 's balance of trade, while a lower exchange rate would increase it.

The Australian economy marks external stability as an important objective because it can influence other important aims such as economic growth, unemployment and inflation. External stability is the concept of sustaining a nation’s external accounts so that in the future, it is able to service its foreign liabilities and can avoid currency volatility. When looking at external stability, we must examine Australia’s balance of payments, which records all economic transactions between Australia and the rest of the world. Australia’s balance of payments has two components, which is the current account and the capital and financial account. The current account measures the receipts and payments for trade in goods and services, transfer payments and income flows, while the capital and financial account shows international borrowing, lending, purchasing and sales of assets.

Changes in exchange rates are the result of changes in demand and supply factors for goods and services, such as changes in tastes, relative incomes, and relative prices. Under a flexible-rate policy, all domestic prices are linked with foreign prices. Any change in the exchange rate automatically alters the prices of all foreign goods to domestic goods. The price change alters the relative attractiveness of imports and exports and maintains equilibrium in each trading partner's balance of

What happens when there is a trade imbalance between two major trading countries? Just ask Great Britain and China. It's hard to get by when the country you need goods from does not really need to trade goods with you. This is what happened with Great Britain and the Qing Dynasty. There was a high demand for China's tea in Great Britain but a low demand for Britain's goods in China. Great Britain was in debt with China and they had to do something to get out. As a result, they turned to selling silver to make the imbalance better. China could care less about Great Britain's silver so Great

Fourth, the global economic situation is not clear at present. The stock market collapse and economic data pointing to a slowdown in China have clouded the outlook for the global economy. At the same time the other emerging economies slowed their growth economy or started to fall. It has the negative impact on the exports. And it even outweighing any advantages the collapse of the dollar may

Raw Materials Unavailability: Raw materials are less available or unavailable. It may be gathered from distance sources that incur high expenses. Poor infrastructure for production of product & services: Due to undeveloped mode of every sector , Production infrastructure is not suitable. Markets are not available: Market for products are not available. People want low cost product because they have less sources of income. Customers are less available for good products: High quality products are costly. They are not beared by customers because their purchasing power is low. More dependent families: Less people earn and more people want to consume. It means more people are dependent upon income generating members. Lands are not suitable for agriculture: Lands are mostly barren due to poor irrigation system, mismanagement of water, unavailability of modern agriculture methods application and tools, etc. People depend upon still upon ancient irrigation system. Cheap labors are available: Labors are easily available at low costs but they are mostly unskilled. So they are useless in technical works or in high rated projects.

These two factors, the devaluation of the exchange rate in conjunction with the impending default of

Exports and imports are what encompass international trade balance. When there are more exports over imports a trade surplus happens and when there are more imports over exports a trade deficit happens. A country will acquire large quantities of foreign assets when it runs in a trade surplus so it can lend internationally to other countries. A country sells of its assets to other countries and becomes a big debtor nation when it runs on a trade deficit. A

1) The scope of any economy is that of creating a balance between its exports and imports, or exporting more than importing, in order to generate national gains and revenues. Within the United States however, it has often happened that the totality of the imports exceeded the totality of the exports. The result of

Concern for Economy: The unexpected increase in inflation will leads the exports to be more expensive than other countries. Then the exports will decline.

- For the foreign producers, when their currency weakens, production becomes cheaper (especially if they have currency reserves in dollars), and their sales go up, since the weaker currency is more attractive to foreign buyers.

An outstanding loan that one country owes to another country or institutions within that country. (Investopedia, 2015) Each quarter in our terms of trade Australia’s imports are greater than our exports causing deficits in the current account. Because Australia borrows and buys so much from overseas, we need to try and balance it out by achieving a surplus in our capital account. Since Australia will always need to trade because of comparative and absolute disadvantages, a relatively high or rising index is vital to reduce the current account as low as possible. A higher index means Australia’s export prices will increase faster than import prices, meaning Australians will get more money for the same amount of goods. (Murray, 2015) However,

Further assumed that the export and import of goods and services between country A and country B perfectly offset one another. The balance of payments accounts of country A and B in theory would be zero. Otherwise, when exports are greater than imports, balance of payments would be in a deficit. In contrast, when exports are less than imports, balance of payments would be in a surplus. As more countries entered global commerce, determining the balance of payments required, netting of all the transactions of goods and services in respective currencies involved. Consequently, a fluctuation in relative currency strength could alter a country’s the balance of payments. Conversely, a country’s balance of payments surplus or deficit could strengthen or weaken its currency relative to others. Hence, stable global monetary system was essential for a stable global commerce. Accordingly many countries adopted the gold standard. Under the gold standard, a currency derived its value from gold. The gold standard provided an automatic rebalancing mechanism for trade imbalances. For instance, when gold reserve is used to settle a deficit balance of payment, it triggered a reduction in money supply, causing interest rate to rise, shrinking the economy and ultimately reducing consumption. The reduced consumption eventually returned the balance of payment to equilibrium. In contrast to a deficit, a surplus balance of payment led to the price inflation, making export less competitive, thereby correcting the surplus and returned the balance of payment to equilibrium. The gold standard, thus was an efficient system to manage the balance of payment accounts. Nevertheless, the one drawback of the gold standard was the scarcity of gold itself. Thus, consequence of limited gold supply was limited money supply which can lead to high interest rates impeding economic growth, a deflationary

The benefits that arise from international trade can be derived from nations that have acquired trade power and established their revenue. According to Stanley, “nations with strong international trade have become prosperous and have power to control the world economy. The global trade can become one of the major contributors to the reduction of poverty.” Over the years, this type of trade has thrived as a result of the numerous benefits that come from importing and exporting good and service on a global scale, more specifically because of the increasing efficiency as well as the effects of supply and

Current Account Deficit. A rise in the ratio of the current account deficit to GDP is generally associated with large external capital inflows that are intermediated by the domestic financial system and could facilitate asset price and credit booms. A large external current account deficit could signal vulnerability to a currency crisis with negative implications for the liquidity of the financial system, especially if the deficit is financed by short-term portfolio capital inflows. Financial crises that have