SS3 First Term Economics Lesson Note – Balance of Payment

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WEEK 5

TOPIC: BALANCE OF PAYMENT

CONTENT:

1. Role of money in international trade
2. Definition of Balance of payment
3. Favorable and unfavorable balance of payment
4. Methods of correcting balance of payment problems

Sup-Topic 1: ROLE OF MONEY IN INTERNATIONAL TRADE

International trade is trade between two or more countries. Foreign trade is made possible as a result of international specialization. Money plays prominent roles in international trade.

Roles of Money in International Trade

1. It is a medium of exchange of commodities in international trade: – The exchange of goods and services among the residents and governments of various countries across international boundaries is done by money
2. In international trade, trade credits are sometimes given and payments are made later.
3. Surplus foreign exchange from international trade is kept as reserves in the form of gold or international currency such as dollar.
4. It serves as unit of account because balance of trade and payment accounts are recorded in monetary terms.
5. At the international level, money can be used for making transfer payment like giving aids to poor countries.
6. It facilitates economic development: Foreign capital and skills are being imported , thereby helping the development of developing countries.

TERMS OF TRADE

A term of trade is the rate at which a country’s exports exchange for its import. Simply put, terms of trade are the price ratio between export and import. It is measured mathematically using this formula below:

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