BOP Deficits and Surplus (1)
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Transcript of BOP Deficits and Surplus (1)
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7/31/2019 BOP Deficits and Surplus (1)
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BOP DEFICITS & SURPLUS
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BALANCEOF PAYMENTSACCOUNT
Current account payment for goods & services(X-M)
Capital account (linked to immigrant and emigrantfinances)
Financial account major player in the BoP
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FINANCIALACCOUNTS
This measures the transactions in financialassets
Split into 3 parts
FDI foreign direct investment
Portfolio investment
& other investments
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FINANCIAL ACCOUNTS
FDI Foreign DirectInvestment
Includes the flow if
money used topurchase controllinginterest in a foreign firm
Portfolio investment
Flow of money topurchase foreign
shares
Other Investments
Trade credit, loans,
purchase of currencies,bank deposits
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BALANCING OURPAYMENTS!
If we have a current account deficit, we must have asurplus on the capital and financial accounts.
This is because we have to pay for everything weconsume and fund it in some way to fund our current
account deficit, we must be selling assets to foreigninvestors.
Additionally, because the data is never completelyaccurate, the accounts also incorporate a net errors andomissions item, which makes sure that everything willbalance.
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SHOULDCOUNTRIESBEWORRIED?
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AREPERSISTENTIMBALANCESONTHE
CURRENTACCOUNTACAUSEFOR
CONCERN?
Traditionally, deficits have been seen as
worse than surpluses.
However, a small imbalance should not be
cause for concern; persistent largeimbalances are more worrying.
Large and persistent deficits can be aproblem because there is a need to finance
the increasing expenditure on imports,usually through loans from abroad (whichshow as a surplus on the financial account);
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AREPERSISTENTIMBALANCESONTHE
CURRENTACCOUNTACAUSEFOR
CONCERN?
having large debts, especially with creditorsabroad, can be problematic when thosecreditors want their money back or decide todiscontinue lending.
Large and persistent surpluses can be a
problem because resources are focused on
producing to meet export demand rather
than domestic demand.
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ISRUNNINGADEFICITORSURPLUSA
PROBLEM?
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CORRECTINGPROBLEMSONTHEBALANCE
OFPAYMENTSCURRENTACCOUNT
Governments tend not to be as concerned withcorrecting surpluses or deficits on the currentaccount as they used to be, but there is evidence ofglobal imbalance, with some countries running thelargest (persistent) deficits they have ever seen and
others (particularly oil-producing counties andChina) running enormous surpluses.
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Theoretically, under a floating exchange rateregime, current account imbalances will beself-correcting. In practise, this tends not tohappen for a multitude of reasons. there are
essentially three ways of correcting a deficit:
expenditure-reducing,expenditure switching andsupply-side policies.
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EXPENDITUREREDUCINGPOLICIES
Expenditure reducing policies require thegovernment to cut the income of its citizens,so that they spend less on imports (forexample, through deflationary fiscal policy);
however, a side-effect of this is thatspending on domestic goods alsodecreases, so AD falls.
This can reduce economic growth andcause recession. It is an unpopular policy,especially politically, and therefore unlikelyto be used.
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EXPENDITURESWITCHINGPOLICIES
Expenditure switching policies require thegovernment to find ways of reducing itscitizens spending on imports, using protectionist measures such as tariffs or
quotas,
or even a devaluation of the currency under afixed exchange rate regime.
However, since this often leads toretaliation, exports will also fall, and thecurrent account deficit may not becorrected.
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SUPPLY-SIDEPOLICIES
Supply-side policies, such as spending on
education and training in order to improve
the quality and therefore competitiveness
of exports, aim to boost export demandrather than reduce import demand.
Whilst they can incur an opportunity cost,
they contribute positively to economic
growth and can be anti-inflationary in the
long run.
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SUPPLY SIDE POLICIES
Privatisation
Deregulations of Markets
Encouragement to Small Business Start ups /
Entrepreneurship Capital Investment & Innovation
Trade Union Reforms
Increased Expenditure on Training & Development
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DIRECT CONTROLS
Heavy Import Duties on Luxurious Goods
Free Entry of Capital Goods
Exchange Controls
Fixation of Quotas Incentives to Exporters
Statuatory Restrictions