Extract 2 - Globalisation and Balance of Payments Inbalances

HideShow resource information

Text and commentary

  • imbalances refer to persistant current account surpluses for some countries constrasted with large currenct accounr deficits in other nations
  • main way of measuring the scale as trade / current account imbalances is as a % of gdp
  • usa runs a permanent (structural) current account deficity on bop
  • countries running external deficits normally see their currency depreciate
  • size uk external deficit halved from 2007 to 2009 due to recession
  • since has been stable at $400b a year
  • real GDP growth in uk economy post crisis has brought about a fall in the external deficit as a % of uk gdp

From diagram 2.1 we can see

  • chine is running a structural surplus 
  • this surplus is falling 
  • usa has structural trade deficit
  • this deficit is declining 
  • both economies have huge trade imbalances

as a % of GDP

  • chinas current account surplus has diminished since peaking at 10% of gdp in 2007
  • chinese surplu aved around 2% 2012-2014
  • most likely because china has been growing at 9% each year 
  • 2004 usa were running current account deficit of around 5% of gdp
  • improved sharply in 2009 and since is running around 2% of gdp
  • still big trade imbalances

from diagram 2.2 we see

  • the dollar has fallen sa a currency 
  • extent of changes isnt great
  • depreciation between 2009 - 2011 of 8.65% but deficit got worse at this time
  • this suggests J curve effect 

chinese yuan exchange rate against 1$

  • china ends fully fixed exchange rate against us dollar 2005 then yuan appreciatesuntil 2008 where an effetive return of a fixed exchange rate is put in place during global financial crisis causing value to remain same till 2010
  • china devalues yuan in the summer of 2015 
  • trade imbalances between china and us - if everyone had fully floating exchange rates it seems likely ceteris paribus chinese currency would appreicte to a greater extent 

Analyse and evaluate why a change in a nations currency doesnt always bring abour a significant substantial change in trade balances

  • trade balance - X-M

how changes in exchange rates affects the trade balance (each bullet point acts as a connective)

  • depreciation in the external value of the us $
  • $ has fallen in value e.g v chinese yuan and japanese yen
  • us goods and services now cheaper in forgein currency terms
  • imports into the usa are more expensive prices in us $
  • overseas demadn for us exports should rise
  • demand for imports coming into us should fall
  • ceteris paribus, the value of us exports will rise (depends on PED and PES)
  • ceteris paribus, the value of us imports will fall
  • so the us trade deficit should reduce in size 

Evaluating the effects of a currency depreciation

In theory a depreciation of the exchange rate causes an expansion of AD and economic growth, but this depends on

  • the length og time lags as consumers and businesses respond to a change in the price of exports and imports 
  • the scale of any change in the exchange rate (figure 2.2…


No comments have yet been made

Similar Economics resources:

See all Economics resources »See all extract 2 resources »