(a) Give the meaning of each of the following: (i) balance of trade (ii) balance of payments. (b)Describe four ways by

Answer Details

(a) Meaning of the terms

1. Balance of trade: This is the difference between the total value of a country's visible exports and its visible imports (physical goods) over a given period. It is favourable when exports exceed imports and unfavourable when imports exceed exports.
2. Balance of payments: This is a systematic record of all economic transactions (both visible and invisible) between a country and the rest of the world over a given period, usually one year. It includes the balance of trade, invisible trade in services, and capital movements.

(b) Four ways by which a balance of payments deficit can be corrected

1. Devaluation of the currency: Reducing the value of the home currency makes exports cheaper and imports dearer, thereby raising exports and cutting imports.
2. Import restriction: Imposing tariffs, quotas and bans on non-essential imports reduces the amount of foreign exchange spent on imports.
3. Export promotion: Encouraging exports through incentives, subsidies and improved quality increases the country's foreign exchange earnings.
4. Deflationary and exchange-control measures: Reducing domestic demand through higher taxes and interest rates, and rationing the use of foreign exchange, cuts spending on imports and improves the balance of payments.