BALANCE OF PAYMENTS Essay

3507 Words Jan 10th, 2014 15 Pages
Balance of Payments
MEANING :
Balance of payment can be defined as systematic record of all economic transactions between the residence of one country and the residence of another country during a given period of time.Economic transactions can broadly be categorized in to four heads which are:
1. VISIBLE ITEMS : visible items include all those tangible goods which can be imported and exported. These are visible as they are made up of some matter or material. this is known as merchandise also.

2. INVISIBLE ITEMS: invisible items include all types of services like shipping,banking,tourist etc.

3. UNILATERAL TRANSFERS: These are those payments which are made without expecting anything in return of it like donations ,gifts etc.

4.
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Deflation is not considered as a suitable method of correcting adverse BOP because it reduces income and causes unemployment in the country

(b) Devaluation: It means decreasing the value of domestic currency in respect of a foreign currency. Devaluation is done by the government of the country which has unfavourable BOP. It is done deliberately to get its advantages . The government officially declares devaluation indicating the extent of decrease in the value of currency. specific currency will be determined with which it is devalued. Devaluation is irreversible. The country can not change the value of currency frequently.

With a decrease in the value of its currency the country has to pay more in exchange for a foreign currency. In this case the export becomes cheaper at the same time import becomes expensive. With this export increases and import decreases. However the success of devaluation depends on the following:

(i) The elasticity of demand for the country’s export should be high.
(ii) The elasticity of demand for country’s import should be fairly elastic

Devaluation as a method of correcting adverse BOP suffers from the following defects:

(i) It reduces the public confidence in

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