Credit side:
(i) When payment is received from a foreign country, it is a credit transaction.
(ii) Exports of goods and services, transfer receipts in the form of gift from foreigners, borrowing from abroad, foreign direct investment and official sale of reserve assets including gold to foreign countries and international agencies.
Debit side:
(i) When payment is made to a foreign country it is debit transaction.
(ii) Import of goods and services, transfer payments to foreigners, lending to foreign countries, investments by residents in foreign countries and official purchase of reserve assets or gold from foreign countries and international agencies are included.

Trade measures include measures to promote exports and to reduce imports.
1. Export Promotion
Exports may be encouraged by
i) reducing or abolishing export duties,
ii) providing export subsidy,
iii) encouraging export production by giving monetary, fiscal, physical and institutional incentives. (Then local people and domestic industries would suffer)
2. Import Control
Imports may be controlled by
i) imposing or enhancing import duties,
ii) restricting imports through import quotas,
iii) licensing and even prohibiting altogether the import of certain non- essential items. But this would encourage smuggling.

1. Price Adjustments
As a result of foreign exchange outflow from a deficit country to a surplus country, there will be a fall in the money supply in the deficit country and increase in the money supply in the surplus country.
2. Interest Rate Adjustments
The contraction or expansion of money supply resulting from the BoP deficit or surplus leads to a rise or fall in the interest rates. A rise in interest rate in the deficit country will encourage investors to withdraw their funds from abroad and invest in their home country.
3. Income Adjustments
A nation with payments surplus will experience rising income which will increase imports and thereafter equilibrium is restored in Balance of Payments.
4. Capital Flows
Changes in the interest rate consequent to the BoP disequilibrium will encourage capital flows from the surplus nations to deficit nations helping restoration of the BoP equilibrium.

1. There are two countries, two commodities and two factors. (2 x 2 x 2 model).
2. Countries differ in factor endowments.
3. Commodities are categorized in terms of factor intensity.
4. Countries use same production technology.
5. Countries have identical demand conditions.
6. There is perfect competition in both product and factor markets in both the countries.

(i) Developed by Heckscher and Ohlin
(ii) Countries with a relative factor abundance can specialise and trade
(iii) Abundance of skilled labour → specialisation → export → exchange for goods are services produced by countries with abundance of unskilled labour
(iv) Exports embody the abundant factor
(v) Imports embody the scarce factor
(vi) Assumes a high degree of factor mobility

i. Stimulate exports and export more goods than import. This approach will provide the gold inflow;
ii. Restrict the importation of goods, especially luxury goods that will provide export balance of trade;
iii. Forbid the production of the final products in its colonies;
iv. Forbid the exportation of raw materials from the parent states to the colonies and allow free importation of raw materials, which are not obtained within the country;
v. Stimulate an export of mainly cheap raw commodities from the colonies;
vi. Forbid any trade of its colonies with other countries, except the parent state, which can resell the colonial goods abroad by itself.

1. There are only two nations and two commodities (2 x 2 model)
2. Labour is the only element of cost of production.
3. All labourers are of equal efficiency
4. Labour is perfectly mobile within the country but perfectly immobile between countries.
5. Production is subject to the law of constant returns
6. Foreign trade is free from all barriers.
7. No change in technology.
8. No transport cost.
9. Perfect competition.
10. Full employment.
11. No government intervention

Factors determining exchange rates are,
(i) Differentials in Inflation
(ii) Differential in Interest rates
(iii) Current Account Deficits
(iv) Public Debt
(v) Terms of Trade
(vi) Political and Economic Stability
(vii) Recession
(viii) Speculation

(i) Depreciation
(ii) Devaluation
(iii) Import Control
(iv) Export Promotion
(v) Exchange Controls
(vi) Production of Import Substitutes
(vii) Monetary Policy
(viii) Capital Import

(i) Availability of variety of goods for consumption.
(ii) Generation of more employment opportunities.
(iii) Industrialization of backward nations.
(iv) Improvement in relationship among countries.
(v) Division of Labour and specialisation.
(vi) Expansion in Transport Facilities.

(i) Factor endowment of a country may change over time.
(ii) The efficiency of the same factor may differ in the two countries. For example: America may be labour scarce in terms of no. of workers

(i) There are two countries and two commodities (2 X 2) model.
(ii) Labour is the only factor of production.
(iii) Labour units are homogeneous.
(iv) Price of commodity is measured by the amount of labour required to produce it.