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.

An open market purchase of government securities  An increase in the discount rate  A cut in the required reserve ratio 14. Deficits may be desirable in the short run if they  help to stabilize the economy when the economy falls below potential output  increase savings necessary for future investment and growth  increase savings necessary for future consumption and demand  help to stabilize the economy when the economy is above potential output 15. If for a country, the quantity of its currency demanded exceeds the quantity supplied, then there is a  balance of payments surplus 

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

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

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

If a country which relies heavily on trade suddenly is cut off from their trade to another country due to something unrelated to them, their economy could fall unexpectedly. For instance, the softwood lumber dispute is an important example of this effect. When the U.S. lessened their purchases on Canadian lumber, Canada was greatly affected. British Columbia lost 9494 jobs simply do to their over reliance on globalization. However, it’s important to consider that even with the loss of those jobs, there is still thousands of jobs simply because of this.

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

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

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

The disasters cause poverty because these countries are often weak financially and cannot afford to restore their country after extensive damage. Therefore due to lack of resources the situation gets worse. It affects their inhabitant's lives causing a lack of production leading to being unable to provide for citizens. In turn leading to poverty, as they cannot even provide substances to trade and lose money. Other factors that affect the lives of citizens are lack of clean water and standard education.

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

The current account is one of the components of the Balance of Payment together with the capital and financial account and the reserve assets account. This represents the difference between a country’s savings and its investment and it is defined as the sum of the payments of goods and services bought from foreigners, net income from abroad and net current transfers. When the current account is in deficit, it means that the country’s net sales abroad value is negative, while it is in surplus when this value is positive. The current account must balance, so surplus of one nation means deficits of another.

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.