Question

Country A changed its import tariff from 7% to 17% on the goods from Country B. 

Which account of the Balance of Payments of Country B would be affected? Explain the overall impact on Balance of Payments of Country B.

Answer 1

The immediate effect falls on Country B’s current account, specifically the visible‑goods (exports) line: higher tariffs in Country A will tend to reduce Country B’s export receipts from sales to A, so credits on the current account decline. As those export receipts fall, Country B’s current‑account balance will worsen (a smaller surplus or a larger deficit); in accounting terms the overall balance of payments must still “balance,” so the shortfall will be financed either by net capital/financial inflows or by running down reserves (recorded in the capital/financial account and reserve items). Secondary effects may follow: lower foreign earnings can put pressure on the exchange rate (leading to depreciation that can partially restore competitiveness), prompt policy responses (export promotion, substitution, or reserve use), and cause real‑economic effects in the export sector (output, employment).