Balance of payment
Balance of payemnt
-
A record of all transactions between the residents of a country and the residents of all other countries
-
Let's say country X. All credit to country X creates a foreign demand for country X’s currency, and all debit creates a supply of the domestic currency.
Balance of payment = Current account + Capital account + Financial account
Current account
Current account = Net export of good + Net export of service + Net income + Net current transfers
Capital account
Capital account = Capital transfers + transactions in non-produced & non-financial asset
Financial account
Financial account = Direct Investment + Portfolio investment + Reserve asset
The relationship between the accounts
-
In the balance of payments, the sum of all the items is always 0
-
Sum of Credit = Sum of Debit
Current account + (Capital account + Financial account + Errors and Omissions) = 0
Current account = -(Capital account + Financial account + Errors and Omissions)
Persistent Current account deficit
Consequences that could arise when Persistent current account deficits financed by loans
Consequences that could arise when Persistent current account deficits sale of domestic assets
Evaluating methods to correct persistent current account deficits
-
In this case, we will use Expenditure-reducing policies (reductions in aggregate demand) in order to deal with persistent current account deficits. Expenditure-reducing policies try to influence the levels of import and export by reducing domestic expenditures through lower aggregate demand.
