Balance of Payments (B.O.P) 2 – SS3 Economics Lesson Note (Second Term)

The balance of payments (B.O.P) is a record showing the relationship between a country’s total payments to other countries and its total receipts from them in a year. It has three parts: the current account, the capital account and the monetary movement account. It is favourable when export earnings exceed import payments and unfavourable when import payments are higher.

Behavioural objectives

By the end of the lesson, students should be able to:

• define the balance of payments;
• list the three parts of the balance of payments;
• distinguish between a favourable and an unfavourable balance of payments;
• state the causes of an unfavourable balance of payments;
• suggest ways of correcting an unfavourable balance of payments.

What are the parts of the balance of payments?

A country’s balance of payments can be grouped into three parts:

1. Current account
2. Capital account
3. Monetary movement account

What is a favourable and an unfavourable balance of payments?

Favourable balance of payments

A country has a favourable balance of payments when the money it receives from both visible and invisible exports is more than the amount it pays for both visible and invisible imports.

Unfavourable balance of payments

A country has an unfavourable balance of payments when what it pays for both visible and invisible imports is greater than what it receives from both visible and invisible exports.

What causes an unfavourable balance of payments?

1. Mono-economy
2. Decrease or fall in a country’s exports
3. Use of crude implements
4. Low production
5. Bad weather that results in low harvest
6. Inflation
7. High taste for foreign-made goods and services

How can an unfavourable balance of payments be corrected?

1. Reduction of imports
2. Encouragement of exports
3. Establishment of import substitution industries
4. Control of foreign exchange to limit imports
5. Increase in local production to boost exports
6. Loans from richer nations as temporary measures
7. Finding new markets to diversify exports

Evaluation

1. Define the balance of payments.
2. List the three parts of the balance of payments.
3. Distinguish between a favourable and an unfavourable balance of payments.
4. State four causes of an unfavourable balance of payments.
5. Mention four ways of correcting an unfavourable balance of payments.

Assignment

Explain any three causes of an unfavourable balance of payments and state three ways a country can correct it.