Why does a country experience a surplus or deficit in its trade balance?
To answer this question, one must look at what the country imports and exports, and why.
For example, a country may import a large quantity of oil because it does not produce oil itself.
Conversely, it may export a large quantity of oil because it produces more oil than it needs.
The make-up of imports and exports will be determined by such factors as natural resource endowments, other comparative advantages, and the stage of economic development of the country.
Is the trend in the country’s balance of payments good or bad?
Factors that may explain a country’s deficit or surplus are exchange rates (is the currency over-valued?) and competitiveness ( how productive is a particular industry in the country compared with its competitors?).
For example, a deficit in a country’s current account may reflect an increase in the purchasing power of its consumers.
If this results from an overvalued currency, this may not be a good thing. If it results from an increase in real income among the consumers due to an increase in their productivity, this reflects positive economic developments.
One must also consider the nature of the goods that are being imported.“Capital goods” (eg machinery or technology used to increase production and enhance efficiency).
Short-term trade deficit in order to produce long-terms gains from increased productivity and competitiveness.
“Consumer goods” (eg clothing, jewelry, CDs, and stereos).
Do nothing to enhance production; they are simply consumed.
“Intermediate goods” (eg personal computers)
May be used to enhance productivity be used like a consumer good.
What can India do to overcome the deficit?
a)*Reduce the monetary demand in the country for imports by:
1.controlling loans
2.reducing the cash balance of the banks
3.raise lending rate to the customers
4.raise their (central banks) bank rates
b) Devaluation, that is by reducing the par value of the currency with those of other Countries
d)Import Restriction
e)Import Substituion
f) Export Promotion
To answer this question, one must look at what the country imports and exports, and why.
For example, a country may import a large quantity of oil because it does not produce oil itself.
Conversely, it may export a large quantity of oil because it produces more oil than it needs.
The make-up of imports and exports will be determined by such factors as natural resource endowments, other comparative advantages, and the stage of economic development of the country.
Is the trend in the country’s balance of payments good or bad?
Factors that may explain a country’s deficit or surplus are exchange rates (is the currency over-valued?) and competitiveness ( how productive is a particular industry in the country compared with its competitors?).
For example, a deficit in a country’s current account may reflect an increase in the purchasing power of its consumers.
If this results from an overvalued currency, this may not be a good thing. If it results from an increase in real income among the consumers due to an increase in their productivity, this reflects positive economic developments.
One must also consider the nature of the goods that are being imported.“Capital goods” (eg machinery or technology used to increase production and enhance efficiency).
Short-term trade deficit in order to produce long-terms gains from increased productivity and competitiveness.
“Consumer goods” (eg clothing, jewelry, CDs, and stereos).
Do nothing to enhance production; they are simply consumed.
“Intermediate goods” (eg personal computers)
May be used to enhance productivity be used like a consumer good.
What can India do to overcome the deficit?
a)*Reduce the monetary demand in the country for imports by:
1.controlling loans
2.reducing the cash balance of the banks
3.raise lending rate to the customers
4.raise their (central banks) bank rates
b) Devaluation, that is by reducing the par value of the currency with those of other Countries
d)Import Restriction
e)Import Substituion
f) Export Promotion