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Balance of payment:
It is an account of all the trade transaction that takes place
between the domestic residents of a country and the foreign
residents of another country over a specified period of time. The
balance of payment account can be divided into two components
the current account and capital account.
The current account represents all the transfer of funds between
one country and the other country which results from the
purchase of goods and services. Its main components are the
payments for
1. Merchandise
2. Factor income
3. Transfer
Payments for merchandise and services:
The current account takes into consideration the import and
export of all the tangible good that are traded between the
countries, also the transfer of services between the countries. If a
country exports goods to the other country and earn revenue on
these exports then it should have a positive impact on its current
account as there is an inflow of funds to the country. Similarly
when a country imports certain goods for example the
components use in car manufacturing from another country as
there is an outflow of funds from the country so therefore it has a
negative impact on its current account. The difference between
total exports and imports is referred to as the balance of trade.
Factor income payments:
It represents the gain of an investor of a country by the securities
such as the stocks and bonds issued by the other country.The
interest and the dividends received by the investors of a country
represents an inflow of capital and it should increase its current
account and when a country pay a return on its securities it
Inflation
National income
Government policies
Exchange rates
Impact of inflation:
The high inflation rate of a country affect its current account
because its exports decreases due to the high cost of production
and the local consumers of that country will prefer to use the
international product as compared to the local product due to the
increased inflation in the country.
National income:
As the national income of the country increases as compared to
the other countries its current account will decreased as the real
income rises, therefore the consumption increases and this will
make an increased demand for the consumption of foreign goods.
Impact of government policies:
The international trade up to a large extent depends on the trade
policies of the governments and it can affect it in many ways.
Subsidies for Exporter:
The governments in some countries protected their domestic
firms from the increased global competition from their foreign
competitors therefore they have given subsidies to the local firms
which are exporting to other countries to produce at a low cost
then their competitors. They have always put some restrictions on
imports like tariff and quotas.
Restrictions on imports:
The government in order to restrict the imports they should
impose a tax on the consumption of foreign goods commonly
referred to as tariff this will make the prices of the local goods
cheaper as compared to the foreign goods and throughthese
measures they should protect their local firm from foreign
competition. Sometimes they imposed quotas on imports that is
to maintain a limit on these imports.
Impact of exchange rates:
If there is an increase in the value of a country currency then its
current account deficit increases because a high value of local