BALANCE OF PAYMENT

Balance of Payment

Balance of Payment

Introduction

The balance of payments categorizes international transactions along several interrelated lines. First, any transaction on the balance of payments is either a credit or a debit. A transaction that involves a payment received from foreign residents, due to the international sales of goods, services, or assets by domestic residents, is a credit on a country's balance of payments; a transaction that involves a payment to foreign residents is a debit. (Destler, 1990)

Second, the balance of payments classifies international transactions as either autonomous or accommodating. An autonomous transaction is undertaken independently of any other international transaction and gives rise to an accommodating transaction. Finally, the balance of payments accounts decompose international transactions into current account transactions, which represent trade in currently produced goods and services and capital account transactions, which represent trade in assets.

“Balance of Payment = (Export - Import)”

Discussion

When interest rate increased in automobile industry, it will instantly impact the overall rating of the automobile vehicles that are posed in the market. This will lead to drop in the customer portfolio that we see today. This will be ultimately reduce the contribution of the automobile industry on the Gross Domestic Product (GDP) and ultimately show reduce economic activity by reducing the export (X) of the economy overall which will also have adverse impact on the balance of payment as Export (X) minus Import (M) is equal to balance of payment, on the other side when interest rate decrease the case will be vice versa.

This unfortunately won't be the case; since income increases of the consumer, this will lead to increase in the purchasing power of the consumer (extracted from the Purchasing Power Parity, PPP theory), which will ultimately grow and have a positive impact on the automobile industry and overall improve the statistics of balance of payments.

Consumer price index aims towards raising the overall level of prices for goods and services. With CPI for the same amount of money after some time you can buy fewer goods and services than before. In this case we say that over time the purchasing power of money has declined, the money lost some of its real value, which will have the adverse impact on the balance of payment.

The opposite process which occurs and witnessed in the overall economic functioning is deflation - a general decline in the price level (negative growth). ...