Question

In the post-COVID-19 and prior to that fluctuation in international oil prices, has affected the export and import and balance of trade, which in turn affected the balance of payments. Evaluate the followings: (a) (i) Balance of trade- (iI) trade surplus and (iiI) trade deficit (for example=4 marks) ( 25-35 words) (b) (i) Balance of payment (i) current account and (ii) capital account

Answer 1

The question mentions that we need to consider the time before fluctuation in international oil prices, so we wont take them into account.

The Covid crisis has depressed economic activity everywhere. Consumption is down, and so is trade. How does that affect each of the mentioned accounts? Lets see.

Ai. Balance of trade- Balance of trade, also called net exports, is the difference between the exports and imports of a country.

Because trade is down, this would mean that countries whose BOT is negative (meaning they import than export) will increase their BOT (meaning it will move towards positive/become positive). Countries whose BOT is positive (meaning they export than they import), will decrease their BOT (it will move towards 0/negative).

Aii. Trade surplus- This is related to above only. A trade surplus is when exports are higher than imports. As shown in part A, trade surplus of BOT positive countries would decrease.

Aiii. Trade deficit- Trade deficit is when imports are higher than exports. As explained in part A, it would decrease.

Bi. Balance of payment (BOP)- BOP is a statement of all transactions made between entities in one country and the rest of the world over a defined period of time.

As trade goes gown, Balance of payments would decrease as countries need to pay and recieve less. The BOP account would have less/smaller entries.

Bii. Current Account- A current account of a country is the account of its total revenues and spendings in a year. Net exports are part of it (as they can be either revenue or cost depending on if a country has trade deficit or surplus) and so are revenues such as taxes.

Taxes revenue would go down. Government will have to subsidize many things and increase spending on healthcare. So it looks like revenues would decrease while spendings would increase for the government. Hence Current account balance would decrease.

Biii. Capital Account- Capital account is a record of the inflows and outflows of capital that directly affect a nation's foreign assets and liabilities.

As economic activities depress becaues of covid, less assets would be bought, both by foreign investors and domestic investors. Depending upon whether foreign investors were investing more in the domestic market, or if domestic investors were investing more in foreign markets, a country's capital account would get affected positively or negatively (just like balace of trade).