Balance of payments deficit or surplus essay

Components of balance of payments

Fred Bergsten has argued the U. Main Causes of Structural Trade Surpluses There are several causes of a trade surplus and each country will have a unique set of circumstances: Export-oriented growth: Some countries have set out to increase the capacity of their export industries as a growth strategy. After victory in the Napoleonic wars Great Britain began promoting free trade, unilaterally reducing her trade tariffs. Key Concepts and Summary Trade surpluses are no guarantee of economic health, and trade deficits are no guarantee of economic weakness. Second, the government must reduce its health care spending. The Great Depression led countries to abandon the gold standard and engage in competitive devaluation of their currencies, but the Bretton Woods system that prevailed from the end of World War II until the s introduced a gold-convertible dollar with fixed exchange rates to other currencies. Power was associated with wealth, and with low levels of growth, nations were best able to accumulate funds either by running trade surpluses or by forcefully confiscating the wealth of others. From the mids into the mids, South Korea often had trade surpluses—that is, it was repaying its past borrowing by sending capital abroad. A trade deficit can then occur even if all the imports are being sold by, and sending profit to, a domestic firm. Fred Bergsten and Joseph E.

A balance of payments surplus means the country exports more than it imports. Although the totals of payments and receipts are necessarily equal, there will be inequalities—excesses of payments or receipts, called deficits or surpluses—in particular kinds of transactions.

Balance of payments accounts

However the renminbi remains managed and the new flexibility means it can move down as well as up in value; two months after the peg ended the renminbi had only appreciated against the dollar by about 0. A country with a surplus on the current account sees capital outflows of the same amount. Growth was low, so stimulating a trade surplus was the primary method of strengthening a nation's financial position. Increased spending on education will increase productivity and foster greater economic growth, so a budget deficit is justified. John Maynard Keynes , one of the architects of the Bretton Woods system had wanted additional rules to encourage surplus countries to share the burden of rebalancing, as he argued that they were in a stronger position to do so and as he regarded their surpluses as negative externalities imposed on the global economy. If imports are more in demand than exports, domestic jobs may be lost to those abroad. We investigate and discuss the links between international capital flows, banks, and recession in The Impacts of Government Borrowing. When is it likely to work out poorly? A rising currency would make exports more expensive, imports less so, and push the trade surplus towards balance. When the activities of a country's people provide enough income and savings to fund all their purchases, business activity, and government infrastructure spending, then the current account is in balance. In the mids, a number of countries in East Asia—Thailand, Indonesia, Malaysia, and South Korea—ran large trade deficits and imported capital from abroad. What key factor or factors are making the difference in the outcome that results from a trade surplus? In and , American economist Paul Davidson had been promoting his revamped form of Keynes's plan as a possible solution to global imbalances which in his opinion would expand growth all round without the downside risk of other rebalancing methods.

Treasury once again declined to label China a currency manipulator in their February report to Congress. Imbalances caused gold to flow out of the US and a loss of confidence in the United States ability to supply gold for all future claims by dollar holders resulted in escalating demands to convert dollars, ultimately causing the US to end the convertibility of the dollar into gold, thus ending the Bretton Woods system.

One of the persistent disputes between the USA and China has revolved around allegations that the Chinese have manipulated the Yuan so that Chinese export industries can continue to sell huge volumes into North American markets.

causes of balance of payment deficit

Compare Investment Accounts. Subscribe Thanks. SHARE POST: Few subjects in economics have caused so much confusion—and so much groundless fear—in the past four hundred years as the thought that a country might have a deficit in its balance of payments.

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Pros and Cons of a Trade Deficit