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SS3: ECONOMICS - 2ND TERM

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  1. Balance of Payment I | Week 1
    4 Topics
  2. Balance of Payment II | Week 2
    4 Topics
  3. Economic Growth & Development | Week 3
    1 Topic
    |
    1 Quiz
  4. Economic Development Planning | Week 4
    2 Topics
    |
    1 Quiz
  5. International Economic Organisations I | Week 5
    4 Topics
  6. International Economic Organisations II | Week 6
    6 Topics
    |
    1 Quiz
  7. Current Economic Plans | Week 7
    5 Topics
    |
    1 Quiz
  8. Economic Development Challenges | Week 8
    4 Topics
  9. Economic Reform Programs | Week 9
    5 Topics



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In international trade importing countries make payments for goods and services from other nations while exporting countries receive a receipt. Balance of Payment is the record of transactions of payment and receipts between one country and other countries of the world. The balance of payment therefore is the annual records of payment a country makes on importation and receipts received from the commodities exported. The balances of payment adopt the principles of double-entry bookkeeping in its accounting method. This means that total debit items must be offset or paid for by a debit through foreign exchange remittance. 

Components of Balance of Payment

Balance of payment has three accounts

  1. The current account
  2. The capital account
  3. The official settlement account

1. The current account: Current account shows the flow of payment and receipts for goods and services and transfer payment. It consists of transactions which occur regularly. It deals with payment for currently produced goods and services. It also shows income and expenditure both on visible imports and exports, payment on banking, shipping, insurance, and other services. 

2. The capital account: This is the account that shows the capital movement in form of investment and loans. It is the account that shows an actual transfer of money from one country to another e.g. Net investment abroad, short-term loans, long-term leading, borrowing, and reserves. It also records errors and omissions.

3. The official settlement account: This is the account that shows the change in its cash and the change in its official reserve assets during the year.

Balance of Payment Disequilibrium

A balance of payment disequilibrium exists if the total receipt of a reporting country on the combined current and capital account is not equal to the total payment made to all other countries, during a given period, usually a year.

Balance of payment disequilibrium could be deficit or surplus.

1. Surplus Balance of Payment

Surplus Bop occurs when the annual total receipt of a country is more than payments.

2. Deficit Balance of Payment

Deficit BOP occurs when the annual total receipt of a country is less than a payment.

Effects of Surplus Balance of Payment

1. Increase the nations external reserve 

2. Attract foreign investors

3. It indicates improvement in the well being of a nation

4. Encourages economic growth and development

5. It makes a nation to be a force to be reckoned with among countries because she will be classified among the rich nations.

Evaluation Questions

 Distinguish between the following

i. Visible import and visible exports

ii. The current account and capital account

iii Surplus balance of payment and Deficit balance of payment

View Answer

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Evaluation questions

 Distinguish the following

i. Visible import and visible exports

ii. The current account and capital account

iii. Surplus balance of payment and Deficit balance of payment

 

Solution

i. Difference between visible import and visible export

Visible imports are tangible and physical goods bought from other countries such as electronics, vehicles, etc.

Visible exports are tangible and physical goods sold to other countries such as cocoa, crude oil, etc.

ii. Difference between current account and capital account

Current account: It refers to two main aspects of income and expenditure namely;

a. The value of exports of visible and tangible goods such as cars, machinery, etc. This aspect of export refers to the balance of trade

b. The values of invisible exports and invisible imports. They are regarded as services such as shipping, banking, tourism, aviation, insurance, etc.

Capital account: This shows the actual transfer of capital or money to other countries. It is the actual transfer of money either as a means of setting up long term investments or as loans

iii. Difference between Surplus balance of payment and Deficit balance of payment

a. Surplus balance of payment refers to a situation where the receipt of a country is more than the payment of the country to another country.

b. Deficit balance of payment refers to a situation where the receipt of the country is less than the payment of the country to other countries.

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