BOT

Question 1

what is a favourable BOT position?

Answer 1

avoidance of large and persistent BOT deficit
OR
improved balance of trade surplus

Question 2

what is a BOT deficit?

Answer 2

export revenue < import expenditure

Question 3

what are the causes of a BOT deficit?

Answer 3

1) growing domestic income/falling foreign income
as NY ↑/↓, purchasing power and hence demand of import exports↑/↓. ASSUMING initial BOT eqm, ↓X/↑M leads to BOT deficit

2) falling international competitiveness
countries with higher domestic inflation rates relative to trading partners will find domestic goods more expensive. ↑M, ↓X
ASSUMPTION: DD for exports is price elastic
alternatively, consider low productivity/rate of innovation

3) improvement in terms of trade
obtaining more foreign goods for the same amt of domestic goods produced

4) appreciation of currency
price of X in foreign currency ↑, Qdd ↓. price of M in domestic currency ↓, Qdd ↑. assuming |PEDx + PEDm|>1, BOT worsen