TERMS OF TRADE
This refers to the rate at which the country’s export exchanges with those from other country. That is:
It determine the value of export in relations to import so that a country can know whether its trade with the other country is favourable or unfavourable
Favourable terms of trade will make the country spent little on import and gain a lot of foreign exchange from other countries For example; Then table below shows trade between Kenya and China in the year 2004 and 2005, with the Kenyan government exporting and importing to and from china, and China also importing and Exporting from and to Kenya.
Calculate the Terms of trade for;
BALANCE/IMBALANCE OF TRADEFactors that may lead to either favourable or unfavourable terms of trade
The country is experiencing a favourable terms of trade if:
The country will experience unfavourable terms of trade if;
Reasons for differences in terms of trade between countries
The terms of trade may differ due to:
Balance of trade
This is the difference between value of country’s visible exports and visible imports over a period of time. If the value of visible/tangible export is higher than the value of visible/tangible imports, then the country experiences favourable terms. If less than the invisible value, then the country is experiencing unfavourable. The country is at equilibrium if the value of visible export and import is the same,
BALANCE OF PAYMENT
This is the difference in the sum of visible and invisible export and the visible and invisible imports. If positive then it means the country is having favourable terms, while if negative, then it means unfavourable It goes beyond the balance of trade in that it considers the following
Balance of Payment account
This is the summary showing all the transactions that have taken place between a particular country and the rest of the world over a period of time. The transaction may arise from
Components of balance of payments account
The balance of payment account is made up of the following
Balance of payment on current account
This is the account that is used to determine the difference between the value of the country’s visible and invisible imports and exports. That is
In the account, the payments for the visible and invisible imports are debited while the receipts from visible and invisible exports are credited that is
For example;
A given country had the following values of visible and invisible export and import during the year 2004 and 2005
Required;
Prepare the country’s balance of payments on current account for the years 2004 and 2005 and comment on each of them. Balance of payments on capital account
This account shows the summary of the difference between the receipt and payments on the investment (capital). Receipts are income from investments in foreign countries while payments are income on local investments by foreigners paid out of the country. The capital inflow includes investments, loans and grants from foreign donors, while capital outflow includes dividends paid to the foreign investors, loan repayments, donations and grants to other countries. In the account the payments are debited, while the receipts are credited. That is;
The official settlement account
This account records the financial dealings with other countries through the IMF. It is also called the foreign exchange transaction account, and is always expected to balance which a times may not be the case. That is;
Balance of payment disequilibrium
This occurs when there is either deficit or surplus in the balance of payments accounts. If there is surplus, then the country would like to maintain it because it is favourable, while if deficit, the country would like to correct it.
Causes of balance of payment disequilibrium
It may be caused by the following;
Correcting the balance of payment disequilibrium
The measures that may be taken to correct this may include;
Terms of sales in international trade
Here the cost trading which includes the cost of the product, cost of transporting, loading, shipping, insurance, warehousing and unloading may be expensive. This makes some of the cost to be borne by the exporter, as some being borne by the importer. The price of the goods quoted therefore at the exporters premises should clearly explain the part of the cost that he/she is going to bear and the ones that the importer will bear before receiving his/her goods. This is what is referred to as the terms of sale
Terms of sales therefore refers to the price quotation that state the expenses that are paid for by the exporter and those paid for by the importer. Some of the common terms include;
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