(a) Distinguish between domestic trade and external trade. (b) Distinguish between terms of trade and balance of trade (c) Outline four causes of balance of...

Answer Details

(a) Domestic trade refers to the buying and selling of goods and services within the boundaries of a country. It is also known as internal trade. External trade, on the other hand, refers to the exchange of goods and services between different countries. It is also known as international trade.

(b) The terms of trade (TOT) refer to the ratio of a country's export prices to its import prices. It measures the country's ability to purchase imports with the proceeds from its exports. A rising TOT indicates that a country is able to purchase more imports for the same amount of exports, which is generally considered a positive indicator of the country's trade performance.

The balance of trade (BOT) refers to the difference between a country's exports and imports. A positive BOT means that the value of exports is greater than the value of imports, while a negative BOT indicates that the value of imports is greater than the value of exports. The BOT is an important indicator of a country's trade performance and its impact on the economy.

(c) The causes of balance of payments deficit in a country can be broadly categorized into four main factors:

1. Trade deficit: A trade deficit occurs when a country imports more goods and services than it exports. This leads to a decrease in foreign currency inflows and an increase in foreign currency outflows, which leads to a deficit in the balance of payments.
2. Capital outflows: A country may experience a capital outflow when its residents and companies invest more money abroad than foreign investors invest in the country. This can also lead to a decrease in foreign currency inflows and an increase in foreign currency outflows, resulting in a balance of payments deficit.
3. Government spending: Government spending that exceeds government revenue can also cause a balance of payments deficit. This is because the government may need to borrow money from abroad to finance its spending, leading to an increase in foreign currency outflows and a decrease in foreign currency inflows.
4. Exchange rate fluctuations: Exchange rate fluctuations can also cause a balance of payments deficit. For example, if a country's currency depreciates, its imports become more expensive, leading to an increase in the trade deficit and a decrease in the balance of payments. Similarly, if a country's currency appreciates, its exports become more expensive, leading to a decrease in the trade surplus and an increase in the balance of payments deficit.