BALANCE OF PAYMENT PROBLEMS- TRADE AND INTEGRATION

HideShow resource information
  • Created by: Simran
  • Created on: 26-02-14 21:27

BALANCE OF PAYMENT PROBLEMS!!

Balance of payment problems are caused by imbalances b/w the diferent sections of the account

Causes of imbalances on the balance of payments

A trade deficit can come about in 5 ways:

1) high levels of consumptions causing excessive spending on foreign-produced goods + services

2) high levels of investment spending causing capital goods being imported from abroad

3)a change in comparative advantage causing cheaper goods and services being imported rather than produced domestically 

4) a high or over-valued exchange rate causing consumers to switch away from domestically produced goods and services to those produced abroad

5) structural weaknesses in the economy resulting from domestic firms losing competitiveness against imported goods, due to a lack of investment, high labour costs or low productivity

  • not all of these causes are bad, suggesting that a current account deficit can be a sign of economic strength 
  •  POLICIES TO CORRECT IMBALANCES ON THE BALANCE OF PAYMENTS
  • There are 3 ways to correct imbalances on the balance of payments
  • 1) 'do nothing'- if portray economy as fundamentally 'sound' then would be able to finance the current account deficit by attracting foreign investment, which counts as credit in the capital account of the balance of payments 
  • BUT! There needs to be a policy to correct the imbalance in the balance of payments when the imbalance represents an underlying weakness in the economy. There are 2 reasons why this is:
  • 1- unsustainable: if not using policy then living beyond means and spending more than earning abroad, need to borrow the difference
  • 2- if a…

Comments

No comments have yet been made

Similar Economics resources:

See all Economics resources »See all Globalisation and trade resources »