Reduction in Surplus on Balance of Payments

There was reduction in the surplus on the current account of the French balance of Payments between 1998 and 2000.

Essay Question: Using the data, assess whether this reflects a deterioration in the performance of the French economy. AQA (15)

The current account measures the balance of trade in goods and service between France and the rest of the world; one macro economic objective of the govt is to maintain equilibrium on the current account. A declining surplus from E33.8 to E22.7bnl suggests the current account is deteriorating. However, it is still is in a significant surplus.

A declining surplus suggests the French economy is becoming relatively less price competitive because the value of imports is increasing faster than the value of exports. However, on line 15 it says French competitiveness improved by roughly 1%.

A declining surplus suggest domestic AD is increasing and it cannot be all met by domestic suppliers therefore they have to import from abroad. This may suggest inflationary pressures are increasing in the economy. It would be useful to have data on inflation.

However, there are reasons not to be concerned. Firstly, it was partly caused by a 14% growth in exports this “created over 500,000” jobs. Creating employment is perhaps a more important macroeconomic objective than the current account. A growth in imports of 20% suggests that AD is increasing very fast. This may cause inflation if the economy is close to full capacity, however, rising AD is also likely to cause an increase in economic growth and reduce unemployment

Also the decline in the current account was due to factors other than declining competitiveness such as an appreciation in the dollar, which made Euro exports less price competitive. In the passage, it also mentions many other factors, which cause a deterioration, such as; “a national investment drive which is essential to high non-inflationary growth.” Increased demand for capital goods reduced the surplus but this is good for the economy.

In conclusion, France still has a significant surplus it should not be concerned about its reduction because it mainly appears to have happened due to stronger demand, there is not any evidence to suggest the economy is becoming uncompetitive. The main concern may be a rise in inflation if domestic AD is increasing too fast.

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