Determinants of balance of payments, Macroeconomics

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Determinants of balance of payments:

Broadly speaking, trend behaviour of merchandise exports and imports along with their  terms of  trade,  net invisible earnings and autonomous capital inflows affects a country's BOP. Each one of these variables is a stimulus to growth and determines the long term viability of external sector. First, exports hold the key to achieving a sustainable balance between the requirements of higher  growth and of ensuring  viability  in  the external  sector. As  a determinant, the higher the share of exports in a country's GDP, faster will be the growth of the  economy in response to an increase  in overseas demand. Second,  imports are a positive function of GDP. An  intrinsic  link between merchandise imports and  exports  leads  to  vigorous export growth and high level of GDP. However as expected, import price is negatively related  to  its volume. Third,  among  the items  of net  invisible earnings, a  steady and continuous  flow  of  remittances (insensitive to  interest  rate) does have  a positive effect  to sustain a high level  of trade deficit. Examples of India, Turkey and Philippines are a pointer in  this direction. Fourth, services exports hinge on the degree of association and direction of causality between service orientation of the output structure and the share of services  in  international trade (RBI, Report on Currency and Finance 2002-03, p.133). Fifth,  steady foreign investment inflows are promised to support the  investment needs of the economy for higher growth and a source of  prudent debt management. For, refinancing  of costly debts  and prepayment  of  identified high cost  debt in external debt management will have a positive impact on BOP capital account.

 


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