Explain how it is possible for a country to have a positive balance of trade but...

Explain how it is possible for a country to have a positive balance of trade but a negative balance of payments.

Expert Solution

Balance of Trade is the minor subset of the Balance of Payment (BOP). BOP has below three accounts:

- Current Account

- Capital Account

- Financial Account

Balance of Trade (BOT) is a part of Current Account and takes into account the merchandise exports and imports.

So, BOT = X - M

where X = imports

M = imports

BOT is positive or in surplus, if X > M i.e country's exports are greater than its imports.

However, this only constitutes the current account of BOP. In order to get a broader picture, we need to include the capital and financial account into the limelight.

If there is deficit in the capital or financial account which overcompensate the positive BOT in the current account, then there shall be negative BOP. This happens when there is huge reduction by foreigners in the country's domestic assets.

So, Positive BOT does not guarantee a positive BOP

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Rahul Sunny answered 7 months ago

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