What do you know about Balance of Trade and Balance of payment?

Answer: Balance of Trade and Balance of payment

The Balance of trade (BOT) is the amount, by which the value of a country’s export goods exceeds the value of its imports of goods. On the other hands, the balance of trade is the difference between the total value of visible imported goods and the total value of visible exported goods of a country for a particular period (generally one year).

The Balance of payment

The balance of payment (BOP) is defined as a systematic record of all economic transactions during the period between residents of the reporting countries. It is a complete record of all kinds of receipts and payments of a country with the rest of the world in a particular period (one year).

 Items of Balance of payment

Items of an imaginary balance of payment is given below:

Debit/Receipts	Credit/Payments
1. Export goods	1. Import goods
2. Export Services	2. Import services
3. Foreign donation	3. Donations to other countries
4. Capital received from abroad	4.Capital expenditure, investments in abroad
5. Interest received against investment abroad	5.Interest against foreign investments
6.Adjusting	6. Adjusting

 Classification of items under Balance of payment

Items under the balance of payment maybe classified as under:

1. Current Account

2. Capital Account

3. Unilateral Transfer Account

4. Transfer of Gold

5. Adjusting Account

 Difference between Balance of Trade and Balance of Payment

Balance of Trade and Balance of Payment is not the same thing. The main difference is given as under:

1. Balance of Trade (BOT) is the difference between Imports and Exports of visible goods and Balance of Payment(BOP) is the difference between Imports and Exports of visible and invisible goods and all other economic transactions.

2. BOT includes the accounts of visible goods but  BOP includes an account  of visible and invisible  goods and capital goods/reserve adjustments.

3. Balance of Trade is partial account and BOP is a complete account.

4. BOT is rarely balanced and BOP is always balanced.

5. Balance of Trade cannot show a complete economic picture of a country and Balance of Payment can’t show a complete economic picture of a country.

Question::01.15: Discuss the Major components of the balance of payment (BOP).

Answer: The Major components of the balance of payment (BOP). The BOP accounting system can be divided conceptually into four major accounts. The first two accounts are- the current account and the capital account-the records purchases of goods, services, and assets by the private and public sectors. The official reserves account reflects the impact of central bank intervention in the foreign exchange market. The last  account -errors and omissions-captures mistakes in recording BOP transactions.

1. Current Account:

The records four types of transactions among residents of different countries
1.    Exports and imports of goods (or merchandise)
2.    Exports and imports of services
3.    Investment income
4.    Gifts

2. Capital Account:

The second major account in the balance of payment accounting system is the capital account, which records capital transactions- purchases and sales of assets-between residents of one country and those of other countries. The capital account can be divided into two categories:

(a) Direct foreign investment (DFI)
(b) Portfolio investment.

Official Reserves Account: The third major account in the BOP accounting system is the official reserves account. The official reserves account records holdings of the reserves held by a national government. These reserves are used to intervene in the foreign –exchange market and in transactions with other central banks. Official reserves comprise four   types of assets:
1.    Gold
2.    Convertible currencies
3.    SDRs
4.    Reserve position at the IMF

Errors and omissions: The last account in the BOP accounting system is the errors and omissions account. One truism of the BOP accounting system is that BOP balance. In the theory the following equality should be observed.
Current Account + Capital Account + Official Reserves Account =0

However, equality is never achieved in practice because of measurement errors. The account is called errors and omissions  is used to make the BOP balance in accordance with the following equation:
Current Account + Capital Account + Official Reserves Account + Errors and omissions =0

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Common Import and Export Documents are used In International Trade?

There are many documents involved in international trade, such as commercial documents, financial documents, transport documents, insurance documents, and other international trade-related documents. In processing the export consignment, documentation may be executed in up to four contracts: the export sales contract, the contract of carriage, the contract of finance, and the contract of cargo insurance. It is therefore important to understand the role of each document and its requirements in international trade.

Commercial Documents

An offer to sell goods and should state clearly the price, details of quality, quantity, trade terms, delivery terms, and payment terms.

Prepared by: exporter

Sales Contract

An agreement between the buyer and the seller stipulating every detail of the transaction. Since this is a legally binding document, it is, therefore, advisable to seek legal advice before signing the contract.

Prepared by: exporter and importer

Pro Forma Invoice

An invoice provided by a supplier prior to the shipment of merchandise, informing the buyer of the kinds and quantities of goods to be sent, their value, and importation specifications (weight, size, and similar characteristics). This is not issued for demanding payment but may be used when applying for an import license/permit or arranging foreign currency or other funding purposes.

Prepared by: exporter

Commercial Invoice

A formal demand note for payment issued by the exporter to the importer for goods sold under a sales contract. It should give details of the goods sold, payment terms and trade terms. It is also used for the customs clearance of goods and sometimes for foreign exchange purposes by the importer.

Prepared by: exporter

 

Packing List

A list with detailed packing information of the goods shipped.

Prepared by: exporter

Inspection Certificate

A report issued by an independent surveyor (Inspection Company) or the exporter on the specifications of the shipment, including quality, quantity, and/or price, required by certain buyers and countries.

Prepared by: Inspection Company or exporter

Insurance Policy

An insurance document, with full details of the insurance coverage, evidencing insurance has been taken out on the goods shipped.

Prepared by: insurer or insurance agent or insurance broker

Insurance Certificate

This certifies that the shipment has been insured under a given open policy and is to cover loss of or damage to the cargo while in transit.

Prepared by: insurer or insurance agent or insurance broker

Product Testing Certificate

This certifies the products are confirmed to a certain international/national technical standard, such as product quality, safety, and specifications.

Prepared by: accredited laboratories

Health Certificate

Document issued by the competent country when agricultural or food products are being exported, to certify that they comply with the relevant legislation in the exporter’s country and were in good condition at the time of inspection, prior to shipment and fit for human consumption.

Prepared by: exporter/inspection authority

Phytosanitary Certificate

Frequently the international requirement that any consignment of plants or planting materials importing into a country shall be accompanied by a Phytosanitary Certificate issued by the exporting country stating that the consignment is found substantially free from diseases and pests and conforms with the current phytosanitary regulations of the importing country. Application of the certificate in Hong Kong should be made to the Agriculture and Fisheries Department.

Prepared by: exporter

Fumigation Certificate

A pest control certificate issued to certify that the concerned products have been undergone the quarantine and pre-shipment fumigation by the approved fumigation service providers. It is mainly required by the US, Canada, Australia, New Zealand and UK’s customs on solid wood packing material from Hong Kong and the Chinese Mainland.

Prepared by: exporter or Inspection Company

ATA Carnet

An international customs document used to obtain a duty-free temporary admission for goods such as exhibits for international trade fairs, samples, and professional equipment, into the countries that are signatories to the ATA Convention.

Prepared by: exporter

Consular Invoice

A document required by some foreign countries, showing shipment information such as the consignor, consignee, and value description, etc. Certified by a consular official of the importing country stationed in the foreign country, it is used by the country’s customs officials to verify the value, quantity, and nature of the shipment.

Prepared by: exporter

Transport Documents

Shipping Order S/O

A document with details of the cargo and the shipper’s requirements, and is the basic document for preparing other transport documents such as the bill of lading, air waybill, etc.

Prepared by: shipper/transport companies

Dock Receipt D/R or Mate’s Receipt

A receipt to confirm the receipt of cargo on quay/warehouse pending shipment. The dock receipt is used as documentation to prepare a bill of lading. It has no legal role regarding processing a financial settlement.

Prepared by: shipping company

Bill of Lading (B/L)

Evidence of a the contract between the shipper of the goods and the carrier. The customer usually needs the original as proof of ownership to take possession of the goods. There are two types: a STRAIGHT bill of lading is non-negotiable and a negotiable or shipper’s ORDER bill of lading (also a title document) which can be bought, sold or traded while goods are in transit and is used for many types of financing transactions.

Prepared by: shipping company

House Bill of Lading (Groupage)

A bill of lading issued by a forwarder and, in many cases, not a title document. Shippers choosing to use a house bill of lading should clarify with the bank whether it is acceptable for a letter of credit purpose before the credit is opened. Advantages include less packing, lower insurance premiums, quicker transit, less risk of damage and lower rates than cargo as an individual parcel / consignment.

Prepared by: forwarder

Sea Waybill

A receipt for cargo which incorporates the contract of carriage between the shipper and the carrier but is non-negotiable and is therefore not a title document.

Prepared by: shipping company

Air Waybill (AWB)

A kind of waybill used for the carriage of goods by air. This serves as a receipt of goods for delivery and states the condition of carriage but is not a title document or transferable/negotiable instrument.

Prepared by: airline

 

House Air Waybill (HAWB)

An air consignment note issued by an air freight agent to provide the cargo description and records. Again, it is not a title document.

Prepared by: forwarding agent

Shipping Guarantee

Usually a pre-printed form provided by a shipping company or the bank, given by an importer’s bank to the shipping company to replace the original transport document. The consignee may then in advance take delivery of goods against a shipping guarantee without producing the original bill of lading. The consignee and the importer bank will be responsible for any loss or charges that occurred to the shipping company if the fault is found in the collection. It is usually used with full margin or trust receipt to protect the bank’s control of the goods.

Prepared by: importer’s bank/shipping company/consignee

Packing List (sometimes as packing note)

A list providing information needed for transportation purpose, such as details of an invoice, buyer, consignee, country of origin, vessel/flight date, port/airport of loading, port/airport of discharge, place of delivery, shipping marks / container number, weight/volume of merchandise, and the fullest details of the goods, including packing information.

Prepared by: shipper

Financial Documents

Documentary Credit D/C

A bank instrument (issuing or opening bank), at the request of the buyer, evidencing the bank’s undertaking to the seller to pay a certain sum of money provided that specific requirements set out in the D/C are satisfied.

Prepared by: the issuing bank upon an application made by the importer

Standby Credit

An arrangement between a customer and his bank by which the customer may enjoy the convenience of cashing cheques, up to a value. Or a credit set up between the exporter and the importer guaranteeing the exporter will pay the importer a certain amount of money if the contract is not fulfilled. It is also known as a performance bond. This is usually found in large transactions, such as crude oil, fertilizers, fishmeal, sugar, urea, etc.

Prepared by: exporter / issuing bank

Collection Instruction

Instruction is given by an exporter to its banker, which empowers the bank to collect the payment subject to the contract terms on behalf of the exporter.

Prepared by: exporter

Bill of Exchange (B/E) or Draft

An unconditional a written order, in which the importer addressed to and required by the exporter to pay on demand or at a future date a certain amount of money to the order of a person or bearer.

Prepared by: exporter

Trust Receipt (T/R)

A document to release merchandise by a bank to a buyer (the bank still retains title to the merchandise), the buyer, who obtains the goods for processing is obligated to maintain the goods distinct from the remainder of his / her assets and to hold them ready for repossession by the bank.

Prepared by: importer

Promissory Note

A financial instrument that is negotiable evidencing the obligations of the foreign buyer to pay to the bearer.

Prepared by: importer

Government Documents

Certificate of Origin (CO)

This certifies the place of manufacture of the exported goods to meet the requirements of the importing authorities.

Prepared by: Trade and Industry Department and five Chambers of Commerce [1]

Certificate of Origin Generalized Systems of Preferences (GSP) Form A (or as Form A)

A CO to support the claim for preferential tariff entry (a reduced or zero rate) of the exporting country’s products into the GSP donors under the GSP they operate. In general, Form A is issued only when the goods concerned have met both the origin rules of the preference receiving country as well as the original criteria of the respective donor country’s GSP.

Prepared by: Trade and Industry Department and five Chambers of Commerce

Import / Export Declaration

A statement made to the Director of Customs at the port of entry/exit, declaring full particulars of the shipment, eg. the nature and the destination / exporting country of the ship’s cargo. Its primary use is for compiling trade statistics.

Prepared by: exporter/importer

Import / Export Licence

A document issued by a relevant government department authorizing the imports and exports of certain controlled goods.

Prepared by: Trade and Industry Department, Customs & Excise Department, etc

International Import Certificate (IIC)

A statement issued by the government of the country of destination, certifying the imported strategic goods will be disposed of in the designated country. In Hong Kong, it is issued only to meet an exporting country’s requirement.

Prepared by: Trade and Industry Department

Delivery Verification Certificate (DVC)

A statement issued by the government of the country of destination, certifying a specific strategic commodity has arrived in the designated country. In Hong Kong, it is issued only to meet an exporting country’s requirement.

Prepared by: Trade and Industry Department

Landing Certificate

A document issued by the government of the country of destination, certifying a specific commodity has arrived in the designated country. In Hong Kong, it is issued by the Census and Statistics Department. Application requirements include a letter stating the reason for the application, import declaration & receipt; bill of lading, sea waybill & land manifest; supplier’s invoice; and a packing list (if any).

Prepared by: Census and Statistics Department

Customs Invoice

A document specified by the customs authorities of the importing countries stating the selling price, costs for freight, insurance, packing and payment terms, etc, for the purpose of determining the customs value.

Prepared by: exporter

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 What is the Importance of International Business for economy?

Answer: The points below highlight the importance of international business:

a) Earn foreign exchange: International business exports its goods and services all over the world. This helps to earn valuable foreign exchange. This foreign exchange is used to pay for imports. Foreign exchange helps to make the business more profitable and to strengthen the economy of its country.

b) Optimum utilization of resources: International business makes optimum utilization of resources. This is because it produces goods on a very large scale for the international market. The international business utilizes resources from all over the world. It uses the finance and technology of rich countries and the raw materials and labor of the poor countries.

c) Achieve its objectives: International business achieves its objectives easily and quickly. The main objective of an international business is to earn high profits. This objective is achieved easily. This it because it uses the best technology. It has the best employees and managers. It produces high-quality goods. It sells these goods all over the world. All this results in high profits for the international business.

d) To spread business risks: International business spreads its business risk. This is because it does business all over the world. So, a loss in one country can be balanced by a profit in another country. The surplus goods in one country can be exported to another country. The surplus resources can also be transferred to other countries. All this helps to minimize the business risks.

e) Improve organization's efficiency: International business has very high organization efficiency. This is because, without efficiency, they will not be able to face competition in the international market. So, they use all the modern management techniques to improve their efficiency. They hire the most qualified and experienced employees and managers. These people are trained regularly. They are highly motivated with very high salaries and other benefits such as international transfers, promotions, etc. All this results in high organizational efficiency, i.e. low costs and high returns.

f) Get benefits from Government: International business brings a lot of foreign exchange to the country. Therefore, it gets many benefits, facilities, and concessions from the government. It gets many financial and tax benefits from the government.

g) Expand and diversify: International business can expand and diversify its activities. This is because it earns very high profits. It also gets financial help from the government.

h) Increase competitive capacity: International business produces high-quality goods at low cost. It spends a lot of money on advertising all over the world. It uses superior technology, management techniques, marketing techniques, etc. All this makes it more competitive. So, it can fight competition from foreign companies.

 

Question::01.05: What are the key differences between domestic and International Business?

Answer: Key Differences between Domestic and International Business

Definition of Domestic business and International business 

Domestic business is the kind of trade that is limited geographically within a country. A domestic business involves commercial exchanges that are only done within that country (1). A domestic business which can also be referred to as an internal business involves a producer and a client, who live within the same nation. This means that the laws, business practices, and customs used in a business transaction shall be of the designated country.

International business on the other hand is a business whose production and consumer base is drawn from more than one country (1). An international business does not fall so much to the dispensation of local law but within international agreements for business practice. International business involves transactions between two or more than two countries.

Comparison between Domestic and International Business

Both types of business involve a trade exchange between a willing buyer and a willing seller. Unless the two entities of the supplier and the consumer agree to do business, there will not be any transaction proceeding.
Also, business in both disciplines is completed after an agreement is made over the currency to be used.
Some local business may opt to receive payments in foreign currencies, just as how international business depends on foreign currency to harmonize trade.

Key Differences between Domestic and International Business

Topic	Domestic Business	International Business
Geography	Happens within one country.	Can happen in more than one country.
Quality of products/ services	Standards maybe lower.	Very high standards are expected and enforced.
Currency	Mostly depends on local currency for transactions.	It depends on foreign currencies for transactions.
Research	It is easy to conduct research for the business.	Research processes for the business is very expensive and hard to conduct.
Investment	The capital investment is not as high.	Capital investment is extremely high.
Production factors	There is free and easy movement of the factors of production.	The movement of production factors is limited.

 

While domestic business is defined with the view of geographic limits in mind, international business is not limited and exceeds beyond the geographical limits of a country (1). As well, while the international businesses operate over a wide scope of supply and consumerism between many countries, domestic businesses only stick to providing and facilitating limited exchanges between the people in a given country.

At the same time, domestic businesses do not have to be very cautious or stringent on the quality of products. International businesses must ensure, and maintain very high standards in the quality of products or services offered. The standards applied should fit the standards that are accepted globally.

Another difference between the two kinds of business stems from the capital and currency involved. In most cases, a domestic business costs less to establish and generally performs trade using local currency (2). On the other hand, international businesses ask for a lot of money, but they depend on foreign currency to harmonize their trade.

In the perspective of research done prior to the commencement of production operations, domestic business has an easier approach in doing consumer research, while determining the best product to use (2). An international business must research extensively, for the sake of understanding what the consumer demands, and behavior- when trying to establish the viability of the business.

Lastly, there are many factors that affect the production of a commodity or service by a business owner. In the context of domestic businesses, the mobility of these factors is easier to achieve, more than how you would achieve the mobility of production factors for international businesses. Things such as transport and installation of production implements are far easy to achieve in a domestic business than in an international business.

Source: http://www.differencebetween.net

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