balance of payments

Balance of Payments Disequilibrium

Readers Question: Explain what is meant by a balance of payments disequilibrium? The Balance of Payments is comprised of two main components: The Current Account (trade in goods, services + investment incomes) The Financial Account (used to be called capital account; this is capital flows such as foreign direct investment) If the UK imports more goods and services than we export – then we have a deficit on the current account. A significant deficit on the current account is generally referred to as disequilibrium. It will be matched by a surplus on the…

UK Balance of Payments

UK Balance of Payments

The Balance of Payments is the record of a country’s transactions / trade with the rest of the world. The balance of payments consists of: Current Account (trade in goods, services + investment incomes + transfers) Capital Account / Financial Account (capital and financial flows, net investment, portfolio investment) Errors and omissions. It is hard to collect all data so some is missed out. In theory there should be a balancing between capital and current / financial account. If there is a current account deficit, there should be a surplus on the capital /…

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How does a current account surplus affect demand?

Readers Question: How does a current account surplus change demand in an economy? A current account surplus means that the value of exports is greater than the value of imports (of goods and services). Net exports is a component of Aggregate demand.  (AD) = C+I+G+(X-M). Therefore a current account surplus means that the net exports is contributing to higher domestic demand. For example, China has had a significant current account surplus over the past few years. This high demand for exports is contributing to the high level of Chinese economic growth. If…

How Did Portugal Reduce Current Account Deficit?

How Did Portugal Reduce Current Account Deficit?

Readers Question: Can you tell what Portugal has done to reduce the Current Account GDP deficit so steeply? The reduction in the Portuguese deficit is quite striking. In researching the answer to this question, I came up with a different post – The Portuguese Economic crisis From what I can gather, essentially, the rapid reduction in the current account is due to a sharp fall in consumer spending on imports, combined with some growth in exports – helped by improvements in unit labour costs. However, bear…

Germany’s Current Account Surplus

Germany’s Current Account Surplus

A few years ago, global trade imbalances were dominated by China and the US. At its peak, China’s current account surplus reached over 10% of GDP. By contrast, the US current account deficit reached over 6% of GDP. The classic image was of China manufacturing goods, selling them to the US  consumer. Then with this export revenue, China bought US Treasuries to keep the Chinese Yuan permanently undervalued. Many in the US criticised China for this ‘currency manipulation‘ – In fact, Mitt Romney, the 2012 Republican Presidential candidate,…