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Balance of Payments (BOP) Definition: Balance of payments is systematic record of all economic transactions completed between the residence

of a country and the residence of the rest of the world. Surplus in (BOP): If the receipts of a country are greater than its payments the result is Surplus. Receipts > Payments Balance in (BOP): If the receipts of a country and its payments are equal the result is Balance. Receipts Payments Deficit in (BOP): If the receipts of a country are less than its payments the result is !eficit. Receipts " Payments Simply whene#er$ the foreign payments of a country are more than the foreign receipts of the country$ the deficit in B%P rises. In other words$ whene#er the demand for foreign e&change is more than the supply of foreign e&change the deficit in B%P occurs. Causes of Deficit in (BOP) 'he causes of deficit in B%P are as under( I. Income Type of Disequilibrium: 'he deficit may arise because of changes in income le#el of a country. If in a country the incomes are rising more than the rest of the world$ because of rise in incomes the consumption in the country will increase and the e&ports will decrease. In this way foreign receipts will come down and deficit in B%P occurs. II. Price Type of Disequilibrium: 'he changes in price le#el are also responsible for B%P deficit. If in a country due to demand)pull inflation or cost)push inflation$ the price le#el rises$ the domestic products will become e&pensi#e. In this way$ the e&ports of a country may fall and the imports of a country may increase. In this way$ receipts will come down and payments will increase and caused for deficit in B%P. III. Capital o!ement: 'he capital mo#ement is also responsible for deficit in B%P. *s due to political instability the domestic capital is flowing out then the foreign payments of a country may increase. If the foreign capital is not coming to the country$ the receipts of a country may also go down. 'hus the changes in capital mo#ement at capital accounts of B%P are also responsible for deficit in B%P. I". Structural C#an$es: 'he structural changes which occur in an economy are also responsible for deficit in B%P. 'hey are as( If in a country$ the population increases$ the e&ports will decrease and imports will increase. If in a country$ the natural resources are depleted the e&ports may come down. If in the world$ the substitutes are de#eloped$ they may ha#e the effect of reducing the e&ports of a country.

If a country is engaged in the process of economic de#elopment$ it has to import machinery$ raw material and a #ariety of goods. In this way the country will ha#e to spend foreign e&change on their importation. easures to %emo!e Deficit in BOP Simply to remo#e deficit in B%P$ a country should increase its e&ports and decrease its imports. 'hey are discussed below( I. To &i!e Subsi'ies to ()porters: *ny country which faces deficit in B%P should gi#e subsidies to the e&porters. 'hey may also consist of granting of loans at reduced rates to the e&porters as well as pro#iding insurance facilities and shipment ser#ices etc. +oreo#er$ if countries follow the policy of subsidi,ing the other countries may also follow it. In this way the benefits of subsidies will not be a#ailed. II. %estrictions on Imports: *ny country which faces deficit in B%P may also impose restrictions on imports by increasing the import duties$ imposition of e&change control etc. In this way the imports will decrease. III. Deflation: 'he country which is facing deficit in B%P should follow the policy of deflation. 'his policy can be adopted with the help of tight fiscal policy by decreasing -o#t. e&penditures and increasing ta&es. 'his will ha#e the effect of decreasing the incomes and e&penditures of the people. In this way$ there will be a deflation in the economy. *s a result the imports will decrease and e&ports will increase I". De!aluation: In .//0$ the 1orld +onetary 2onference was held at Brettonwoods. In this conference it was decided that Pound Sterling 345$ !ollar 365 and gold will be used for international transaction. 'he rate of e&change so determined would remain fi&ed. 7owe#er$ a country which faces deficit in B%P was allowed to de#aluate its currency up to .89 without permission of International +onetary :und 3I.+.:5 and more than this with the permission of I+:. In this way the e&ports will increase and imports will decrease. *ccordingly$ the deficit will be cured. ". International onetary *un' (I. .*): *s the international le#el$ the institution named as I+: has been set up. 'his institution has been assigned to perform the following functions( 'o ser#e as a pool of international reser#es. 'o ;eep an eye on e&change rates of currencies. 'o pro#ide assistance to those countries who face persistent deficit in their B%P. In this respect I+: has initiated a lot of and with the help of these farcicalities the member of I+: who faces deficit in B%P$ can get loan from I+: and use it to remo#e its deficit. "I. Depreciation: <nder Brettonwood System it was decided that the rate of e&change between currencies will remain fi&ed. But in ./=.$ *merican President >i&on suspended the con#ertibility of !ollar into gold. 'hus$ since ./=?$ the world is ha#ing the managed :le&ible @&change Rate of System. <nder :le&ible System$ the deficit in the B%P is automatically washed through the policy of !epression. "II. +ppreciation: -

'he policy of appreciation is opposite to that of depreciation. It comes into being when the country faces surplus in B%P under the fle&ible e&change rate system. Balance of Tra'e 'he record of only #isible goods transaction completed between the residence of a country and the residence of the rest of the world$ is ;nown as Balance of 'rade. Terms of Tra'e (TOT) Ratio between the #alue of e&ports and #alue of imports is ;nown as terms of trade. Aalue of B '%' Aalue of + Aalue of B Prices of goods @&port C D of goods e&port Aalue of + Prices of goods Import C D of goods import Surplus,*a!orable TOT: If #alue of B is greater than #alue of + the terms of trade is fa#orable. In other words when the receipts of a country is more than its payments the result is surplus in '%'. Aalue of B > Aalue of + %R Receipts > Payments Deficit,-nfa!orable TOT: If #alue of + is greater than #alue of B the terms of trade is unfa#orable. In other words when the payments of a country is more than its receipts the result is deficit in '%'. Aalue of + > Aalue of B %R Payments > Receipts Causes of Deficit, -nfa!orable of TOT 'he causes of deficitEunfa#orable of '%' are as under( I. ()port of +$ri &oo's: <nli;ely the e&ports of Pa;istan are agri. goods li;e cotton and rice etc. In international mar;ets there are hea#y fluctuations in the prices of these goods. If the prices of such goods fall$ as such goods canFt be stored and they ha#e to be sold e#en at lower prices. *ccordingly$ '%' goes deficit. II. .o/ Income an' Price (lasticities of Deman': 'here is #ery low income and price elasticities of demand for the e&ports of Pa;istan. 'herefore$ e#en at lower prices our e&ports do not increase. 'hus when we ha#e poor income and price elasticities of demand the '%' is going deficit. III. Desire for In'ustriali0ation: 'he poor countries ha#e the desire to industriali,e themsel#es as soon as possible. :or this purpose they ha#e to import raw material$ machinery and automobiles. It means that under de#eloping countries sold at lower prices and purchased at higher prices. In such situation '%' is going deficit. I". Increase in Population: In the poor countries there is a big population pressure and maGor part of increase in population is comprised of uns;illed labor. 'here$ the wages because of such rising labor

are going down. *nd the e&ports of poor countries are also getting cheaper with the result that '%' is going deficit. ". .ac1 of Tra'e -nions: In under de#eloping countries the trade unions ha#e always been wea; and ineffecti#e. *s a result the wages can be depressed down. 1ith this the domestic goods will be produced cheaper and e&ported at lower prices. In this way$ the '%' will remain deficit. "I. Supply of $oo's an' ar1et Structure: 'he competiti#e conditions pre#ail in the e&port sectors of under de#eloping countries. *s a result$ the prices of e&port goods are low. 'hus when the e&ports of under de#eloping countries command lower prices and imports at higher prices the '%' goes deficit. easures to Impro!e TOT 'he '%' can be impro#ed by doing this( 'he country should e&port manufactured goods$ rather agri. goods and primary goods. In order to industriali,e their economies the under de#eloping countries should depend upon their own resources. 'hey should reduce their dependence on imports. 'he population of the country should be controlled so that the demand for imports could decrease. Public *inance *ll Policies$ all measurements$ -o#t. loans and -o#t. e&penditures are related to >.I is ;nown as Public :inance. *inancial Policy: 2ollecting of ta&es that are ;nown as re#enues$ the policy of getting loans inside and outside of the country and how spent itH Is ;nown as financial policy. Difference bet/een Pri!ate an' Public *inance 'he difference between pri#ate and public finance is as under( I. T#e or'er of Income an' ()pen'iture: @ach person first arrangeEestimate his income and than spend according to his income. 1hile$ -o#t. first arrangeEestimate its e&penditures and than get its income by applying ta&es during a financial year. II. Perio' of t#e Bu'$et: @ach person may arrange his budget daily$ wee;ly$ monthly and yearly But -o#t. budget is always for one year. :inancial year of Pa;istan is .st Iuly J ?.st Iune. III. Internal an' ()ternal %esources: @ach person gets his income only internal resources while go#t. gets its income with both internal and e&ternal resources. I". Deficit O% Surplus *inance: <sually the go#t. budget is deficit but common personFs budget is always surplus. 'heir budget can ne#er be deficit. ". ()traor'inary C#an$es: 'he changes occurred in go#t. budget are e&tra ordinary and it is more than common personFs budget. It effect on the economic condition of the state. 1hile$ common personFs budget do not effects on the economic condition of the state.

"I. Pro!ision for *uture: 2ommon persons sa#e their income for problem which may arise in the future. 1hile$ -o#t. not sa#e its income. "II. Secret an' Open Bu'$et: Pri#ate budget is always secret but go#t. budget is always open and ad#ertised and discussed in *ssembly. Sources of *e'eral &o!ernment 2) Ta) %e!enues: 'hrough directK indirect ta&es$ wealth ta&$ property ta&$ gift ta&$ sales ta& and e&cise duty etc. i. *ees: 'he money which people paid to go#t. in return of some go#t. ser#ices is ;nown as fees. ii. Prices: 'he money is paid in return of goods K ser#ices which are pro#ided by the go#t. to the people according to the prices of the goods K ser#ices is ;nown as Prices. 3) 4on Ta) %e!enues: i. State Property: -o#t. has its state property$ by selling its property to the public at low prices get income. :or @&ample( 2oal$ Salt and Iron etc. ii. Pro'ucti!e 5 (nterprise: -o#t. is also in#estment in producti#e wor;s and gets income :or @&ample( 'elephone and Post office etc. Principles,Canons of Ta)ation 'he principles of ta&ation are as underL I. Canon of (quality: @#ery person had to pay ta& according to his income not on a fi&ed rate of ta&. Poor persons had to pay less ta& according to their incomes and rich persons had to pay more ta& according to their incomes. II. Canon of Certainty: 'he payee must be sure that how much ta& he had to payH 1here he payH *nd when he paysH 'he payee must ha#e the ;nowledge of ta& and its procedure. III. Canon of Con!enience: 'he ta& must ta;e when the payee has the income. 7e had to pay nearby areas. I". Canon of (conomy: 'he e&penditures which are paid to collect the ta&es must be less than ta&es that mare ta&es are collected. ". Canon of Simplicity,Proce'ure of Ta): 'he procedure of ta& must be easy that e#ery person can easily ;now and understand its procedure. "I. Canon of Pro'ucti!ity: 'he system of ta& must be according to the needs of the go#t. and the income which is collected from ta&es must be use there where from more income come. "II. Canon of (lasticity: 'he go#t. should ;eep Progressi#eEProportional ta& in mind to applying ta& on the persons.

"III. Canon of *le)ibility: 'he go#t. should gi#e the fle&ibility to the persons according to their income that when income increase than ta& increase and when income decrease than ta& decrease. I6. Canon of De!elopment: 'he money which is collected by ta&es must be use there where from more income come and increase de#elopment in the country. Ta)es 'he amount which is paid to go#t. by the people and firms is ;nown as ta&es. But against such payments the people and firms can not e&pect any direct return from go#ernment. Types of Ta)es 'he ta&es are di#ided into following types( I. Direct Ta): !irect ta& is such a ta& which has to be paid by the person whom upon it has been imposed. :or @&ample( Income ta&$ 1ealth ta& and property ta& in Pa;istan. 'he payee can not shift the burden of such ta& to somebody else.F II. In'irect Ta): Indirect ta& is such a ta& which has to be paid by the person whom upon it has not been imposed. 'he payee can shift the burden of the ta& to somebody else. :or @&ample( 2ustoms duty$ Sales ta& and @&cise duty in Pa;istan. III. Pro$ressi!e Ta): 'he progressi#e ta& is a ta& which changes along with change in income of the persons. 'he rate of ta& on higher incomes is more while it is low in case of low income. I". Proportional Ta): <nder proportional ta&es a uniform ta& rate is imposed on all the incomes of people. If in a country the income ta& rate is .89$ all the persons will ha#e to pay .89 ta&.F ". %e$ressi!e Ta): It is a ta& whose rate falls along with increase in incomes of the people. 'hus$ it is opposite to progressi#e ta&. It also denotes that the poor ha#e to sacrifice more as compared with the rich. 7#y 'i' &o!ernment +pply Ta)es8 &o!ernment ()pen'itures 'he go#t. applies ta&es to complete the following( I. Defense: 'he go#t. spends its much income on the defense of its country. Pa;istan spends M89 of its budget on its defense. 'he most income is spent on defense in 'odayFs world. II. To aintain Discipline: It is go#ernmentFs duty to maintain discipline in the country and for this purpose go#t. spends its income to maintain the discipline in the country. III. ('ucation: ItFs go#ernmentFs duty to pro#ide education to e#ery citi,en. :or this purpose go#t. established school$ college and uni#ersities to pro#ide education and spends its income for this purpose.

I". 9ealt#: 'he go#t. is also spends its income to pro#ide health facilities to the people and for this purpose built new hospitals and pro#ide modern machinery. ". Public /or1s: 'he go#t. is also spent its income for public wor;s as li;e build public par;s and public libraries for the people "I. Communication an' Transportation: 'he go#t. is also try to pro#ide the best resources of communication and transportation to the people and for this purpose spend its income and builds new roads and airports etc.