BALANCE OF PAYMENT

 

Subject: 

ECONOMICS

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Term:

FIRST TERM

Week:

WEEK 11

Class:

SS 3

Topic:

BALANCE OF PAYMENT

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Previous lesson: 

The pupils have previous knowledge of

THE CAPITAL MARKET.

that was taught as a topic in the previous lesson

 

Behavioural objectives:

At the end of the lesson, the learners will be able to

• EXPLAIN BALANCE OF PAYMENT
• EXPLAIN THE MEASUREMENT OF BALANCE OF PAYMENT

 

Instructional Materials:

• Wall charts
• Pictures
• Related Online Video
• Flash Cards

 

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Methods of Teaching:

• Class Discussion
• Group Discussion
• Asking Questions
• Explanation
• Role Modelling
• Role Delegation

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Reference Materials:

• Scheme of Work
• Online Information
• Textbooks
• Workbooks

 

Content:

 

BALANCE OF PAYMENT.

The balance of payment is a statement that summarizes all transactions between entities within a country and the rest of the world over a given period, such as a quarter or year. This includes both goods and services traded, as well as financial assets and liabilities.

There are several components to the balance of payment, including the current account, capital account, and financial account. The current account records transactions in goods and services, while the capital account tracks changes in ownership of assets between countries. Finally, the financial account captures changes to a country’s wealth due to international capital flows.

Understanding the balance of payment is important for policymakers and businesses alike, as it provides insight into global trade trends and financial flows. By tracking and analyzing these dynamics, countries can make more informed decisions about their economic policies and business strategies going forward.

EVALUATION

1. What is meant by the balance of payment?

The balance of payment is a measure of a country’s economic health and financial stability, reflecting all transactions that take place between its residents and entities in other countries over a given period of time.

2. What is balance of payment with example?

One common example of balance of payment is the current account balance, which tracks the value of goods and services traded as well as financial flows between countries. Other components can include the capital account, which measures changes in ownership of assets, and the financial account, which records international capital flows.

3. What are the four components of balance of payment?

Some of the main components of the balance of payment include the current account, which includes trade in goods and services as well as payments for foreign investments; the capital account, which measures international ownership of assets; and the financial account, which records changes to a country’s wealth due to capital flows. Other components may also be included, such as the official reserve account, which tracks central bank holdings of foreign exchange.

4. Why is understanding the balance of payment important for policymakers and businesses?

Understanding the balance of payment is critical for policymakers and businesses alike, as it provides insight into global trade trends and financial flows. By tracking these dynamics, countries can make more informed decisions about their economic policies and business strategies, helping them to maintain a strong and vibrant economy. Additionally, businesses can use insights from the balance of payment to inform their strategic decision-making around investments, trade deals, and other financial transactions.

MEASUREMENT OF BALANCE OF PAYMENT.

There are various methods and metrics used to measure the balance of payment, including the current account balance, which tracks trade flows in goods and services as well as capital transfers between countries. Other components may include the capital account, which measures international investment activity; the financial account, which captures changes to wealth due to foreign exchange rates and other factors; and the official reserve account, which tracks foreign exchange holdings and central bank transactions. These metrics are used by policymakers and businesses alike to gain a better understanding of global economic trends and financial dynamics. By analyzing these underlying trends and drivers, countries can make more informed decisions about their economic policies and business strategies going forward.

The balance of payments (BOP) is the record of all international financial transactions made by the residents of a country.

There are three main categories of the BOP: the current account, the capital account, and the financial account.

The current account is used to mark the inflow and outflow of goods and services into a country.

The capital account is where all international capital transfers are recorded.

In the financial account, international monetary flows related to investment in business, real estate, bonds, and stocks are documented.

BALANCE OF TRADE

Balance of Trade – This is the comparison of a country’s total visible exports with her total visible imports. When visible exports with her total visible imports in monetary terms are equal we have Balance of Trade. A positive or favourable Balance of Trade – means that a country is exporting more in monetary terms than it is importing while a negative or unfavourable balance of trade means that a country is importing more in monetary terms than it is exporting.

BALANCE OF PAYMENT

Balance of payment may be defined as a statement or record showing the relationship between a country’s total payments to other countries and its total receipts from them in a year. A country’s Balance of payment is grouped into three parts.

1.  Current Account

2.  Capital Account

3.  Monetary movement Account

A. Current Account: The Current Account is made up of receipts and payments for visible and invisible services. The visible comprises tangible products such as cars, computer, clothing materials, electronics etc. While the invisible services are: insurance, banking, transport, interest payment and tourism.

B. Capital Account: For a country to set up business in other countries, and for other countries to set up business in its country, there is a need for inflow and outflow of capital both in long and short term; this is contained in the capital account. This is in the form of investments, loans and grants.

C. Monetary Movement Account: There is a need for differences in Current Account and Capital Account to be settled. This is done in the monetary movement Account.

EVALUATION

Write a short note on

 

(a) Balance of trade.

(b)Balance of payment.

TERMS OF TRADE

Term of trade is the rate at which a country’s export is exchanged for her import. It is expressed as a relationship between the prices a country receives for its exports and the prices it pays for imports.

Terms of Trade (TOT) = Index of import price  x  100

Index of import price1

The terms of Trade are favourable if the average price of exports is higher than the average price of imports. The terms of Trade are unfavourable, if the average import price is higher than the average export price, which results in more expensive import than exports and this situation makes the Terms trade to deteriorate. When the Terms of Trade are unfavourable, the index is less than 100. This will reduce the real national income.

The Balance of payment of a country can either be favourable or unfavourable, in most cases it could be balance. A country’s Balance of payment is said to be favourable when the receipts from invisible and visible export trade becomes greater than payment to other countries on invisible and visible imports. A credit balance can be used to increase investment or to add to a country’s gold reserve.

In other hand, unfavorable balance of payment is said to occur when the payments on visible and invisible import is greater than receipts on visible and invisible exports. This is also known as adverse or deficit balance.

HOW TO FINANCE DEFICIT BALANCE OF PAYMENT

Different Options opened to a country seeking to correct her adverse balance of payment. The following options could be considered;

1.  A country can borrow from foreign financial institutions e.g. World Bank, Paris Club.

2.  Assistance could be sought from international financial institutions

3. Foreign investment could be disposed off to offset the debt (if any).

4.  Gold could be exported (if any). 

5.  The national economy could be deflated through monetary and fiscal measures.

6.  Import substitution – This could be in form of curtailment of imports and export stimulation.

7.  The country’s currency could be devalued; this would encourage exports and discourage imports.

Overall, the balance of payments is a crucial indicator of a country’s economic health and stability. It is used to measure the inflow and outflow of goods, services, capital, and currency into and from a country. There are three main components that make up a country’s balance of payments: the current account, the capital account, and the financial account. Factors such as interest payments, capital investment, and exchange rates can impact a country’s balance of payments, and it is important for policymakers to understand these dynamics in order to maintain a healthy economy. There are various methods that a country can use to finance an unfavorable balance of payments, including borrowing money from foreign institutions, seeking assistance from international financial institutions, and reducing or devaluing its currency. Ultimately, the health of a country’s balance of payments is determined by the strength of its economy, as well as its trade relationships with other countries.

DEVALUATION OF CURRENCY

A country devaluation of currency is a deliberate policy through which the value of one country’s currency is reduced in relation to another country’s currency. It can also be defined as a fall in the exchange value of a country’s currency in relation to the currencies of other countries. This is usually done to improve the country’s balance of payment, thereby making its exports more competitive in relation to foreign exports. In other words, a devaluation of currency makes a country’s exports cheaper for buyers outside that country and more expensive for its own citizens who buy imports from abroad.

EFFECTS OF DEVALUATION OF CURRENCY

1.  The exports of the country whose currency is devalued become cheaper.

2.  As a reverse to the above, the import too becomes expensive.

3. The imports and exports of the country become unbalanced (favoring one over the other).

4. The currency values of countries with which a devalued country trades should decrease to maintain equilibrium.

5. Devaluation is usually accompanied by an increase in bills – imports will cost more while exports will earn less.

6. Devaluation can also lead to an increase in foreign investment and tourism in a country, as the prices of commodities are expected to decrease.

7. However, it is important to note that devaluation can have negative effects on a country’s economy as well, such as increased inflation rates and decreased domestic consumption. Therefore, policymakers must carefully consider the potential consequences of a devaluation before implementing this strategy. Ultimately, the success of a devaluation depends on a number of economic factors and trade relationships within the global economy.

CONDITIONS IN WHICH DEVALUATION CAN IMPROVE A COUNTRY’S BALANCE OF

PAYMENT

1.  The demand for import must be elastic. Increase in prices of imports, as a result of devalue

tion, will lead to fall in demand for import.

2.  The country’s export must be elastic i.e. It should be able to response to foreign demand.

3. Devaluation should be performed at the right time which means that it should be performed at a time when the country is suffering from unfavorable balance of payment.

4. A devalued currency will have positive impact on foreign exchange reserves if the country has enough international liquidity to finance its import bills, pending payments due to other countries/countries and has high foreign direct investment inflows.

5. Generally, a devalued currency will make exports more competitive in international market which means that the country will be able to increase its export earnings which can help improve the balance of payment. However, this strategy is not guaranteed to succeed as it depends on a number of economic and political factors. Therefore, it is critical for policymakers to carefully consider all potential consequences of devaluation before implementing this strategy in an attempt to improve a country’s balance of payments. Ultimately, the success of a devaluation depends on a range of economic factors, as well as its trade relationships with other countries and regions within the global economy.

MATHEMATICAL APPROACH TO CURRENCY DEVALUATION

The rate at which a country exchanges her currency for other countries currencies is known as “Exchange rate”.

Example I

Assuming that Nigeria in willing to buy or sell cocoa at N800 per ton and the USA is willing to buy or sell at $100, then the value of the two currencies can be fixed as ………..

N800 = $100

N8     = $1

Example II

If the exchange rate of naira to dollar is as follow:

If Nigeria devalues her Currency by 100%, the new exchange will be …. If formerly

N100 = $1

=  100  x  100  =  N100

100  x    1

N100 +N100 =  N200

Hence   N500 =  $.50

EVALUATION

1.  State five effects of currency devaluation.

2.  Illustrate how currency devaluation can help to correct adverse balance of payment.

ECONOMIC INTEGRATION

Every country in the world strives to achieve economic growth and development. This is better achieved when countries pull their resources together to achieve greater efficiency. This give rise to Economic Integration. Economic integration may be defined as a form of international cooperation among nations to foster their economic interests. A good example of an economic integration in Africa is the Economic Community of West African States (ECOWAS). Other economic integration includes: European Economic Community (EEC), African Development Bank (ADB), the Chad Basin Commission, International Monetary Fund (IMF).

OBJECTIVES OF ECONOMIC INTEGRATION

The following are the objectives of Economic Integration:

1.  To enlarge market that will encourage large scale production

 Economic integration enhances efficiency that is reflected in production units.

3.  It enhances greater resources mobility.

4.  To encourage specialization among countries coming together.

5.  To empower each country to participate effectively in the World market.

6.  To create job opportunities.

7.  To improve the living standard of member nations.

8.  To accelerate economic development in the region.

FORMS OF ECONOMIC INTEGRATION

1.  Free trade area.

2.  Common Market

3.  Economic union e.g. ECOWAS

4.  Customs union

5. Monetary union

6. Fiscal union

7. Political union

8. By exchange rate

PROBLEMS OF ECONOMIC INTEGRATION IN WEST AFRICA

1.  The smaller countries always nurse fear of big countries’ domination.

2.  The formula to adopt in sharing the revenue generated by the groups often generates more heat than light.

3.  Differences in economic and political ideology often make the countries disagree.

4.  Member nations speak different languages. This slows down decision making.

5.  Member nations are unwilling to surrender their sovereignty to bigger countries.

6.  Frequent changes in government of member nations often affect decision making.

7.  Some of the members of economic union e.g. ECOWAS are still tied to the apron of their colonial masters.

8.  Inadequate capital – e.g. ECOWAS cannot meet their plan due to the fact that some countries within the union could not pay their subscription.

9. Internal conflicts – e.g. civil wars, coups d’état are impediments to economic integration in Africa.

Despite these challenges, economic integration remains an important tool for achieving sustainable economic growth and development in West Africa. Through effective coordination and cooperation, countries in the region can overcome these challenges and unlock their economic potential. Ultimately, this will result in greater prosperity for all West Africans.

EVALUATION

1.  Define Economic Integration.

2.  State any five objectives of the Economic Union.

3.  Outline any five problems facing Economic Integration.

4. What are the different forms of Economic Integration, and how do they differ from each other?

5. What factors should be considered when evaluating the effectiveness of economic integration in West Africa?

EVALUATION

1. What is Current Account Balance?
2. Study the following information carefully and use it to answer questions. As a result of the improvement in terms of trade of two of a country’s major export commodities, the total foreign exchange receipts increased by over 10% above that of the previous year, 1997. Nevertheless, this was not sufficient to balance the country’s current account. The government therefore took a short-term loan of $100 million from the international Monetary Fund (IMF).

READING ASSIGNMENT

1.  Amplified and Simplified Economics for SSS by Femi Longe page 426-446.

2.  Essential Economics for SSS by C E Ande page 386-395.

GENERAL EVALUATION

1. What is a Trade Union?
2. Describe any of the four functions of a Trade Union.
3. What are Infant Industries?
4. Outline four objectives of price control policy.
5. Describe three functions of money.
6. What is Economic Development?
7. Explain the importance of economic development in a country.
8. Evaluate the different models used to measure economic development.
9. Based on your understanding of economic development, discuss FOUR factors that contribute to its success or failure in different countries and regions.

WEEKEND ASSIGNMENT

1.  The rate at which a country’s export is exchanged for her import is known as ………..

A. Terms of Trade      B. Balance of Trade     C. Current balance       D. Visible balance

2. The main purpose of the International Monetary Fund is to _________

A. Facilitate the investment in developing countries B. Promote exchange rate stability C. Help member states who are facing balance of payment difficulties D. Regularize the flow of goods and services across borders

3. Which of the following is not a function of money?

A. Medium of exchange B. Store of value C. Unit of Account D. All of the above

4. An infant industry is a new industry that has the potential to grow into __________ in future A. Big industry B. Small industry C. Medium industry D. Micro-industry

5. The main purpose of the Central Bank is to A. Promote monetary stability B. Regulate the financial sector C. Act as a commercial bank D. All of the above

6.  Invisible trade refers to trade in ……… A. services       B. good and services      C. tangible goods      D. short term and long term capital   E. capital goods that cannot be seen

7.  Balance of Trade can be defined as ………. A. the value of imports in relation to the value of a country’s exports      B. the price ratio of imports as against that of exports.  C Equality in the total receipts and payments of a country in a year     D. percentage value of imports over percentage value of exports      E. price of exports versus prices of imports.

8. The Central Bank ____i_ is the only bank in a country that can create money A. Can B. Cannot C. May D. Might E. Must

9. The government engages in price control because it ____i_ A. Seeks solution to the problem of inflation B. Wants to protect the economy C. Aims at providing unlimited quantities of goods D. Seeks to prevent over-production and under-production E. Aims at protecting consumers against high prices

10. _____________________an economic union is a country or group of countries that have agreed to trade on a most favored nations basis, i.e., all member countries must have the same tariffs, quotas and other restrictions governing imports from member countries.

11.  A summary of all the receipt and payment of a country in international transactions is called.…… A. Terms of trade           B. Balance of payment C. Balance of payment adjustment

D. Capital Account

12.  Invisible trade refers to trade in………… A. services     B. goods and services   C. tangible goods    D. Crude oil     E. Short term and long-term capital

 

QUESTIONS

1.  If the United Kingdom buys gold for ₤60 ounce and Nigeria buys the same ounce for N500, what will be the United Kingdom’s exchange rate with Nigeria. A. 1 UK£ = 500 N B. 1 UK£= 5 N C. 600 UK£ = 5 N D. ₤1 = 5 N

2. The purpose of the International Monetary Fund is to: A. Facilitate the investment in developing countries B. Promote exchange rate stability C. Help member states who are facing balance of payment difficulties D. Regularize the flow of goods and services across borders