Disequilibrium in the Balance of Payments Flashcards
What reasons can a surplus be bad?
Inflationary Pressures
Exchange Rate Distortions
Global Imbalances
Resource Misallocation
How does a surplus cause inflationary pressures?
A sustained surplus means an excess inflow of foreign currency, which can increase domestic money supply leading to inflation
How does a surplus cause exchange rate distortions?
A large surplus leads to currency appreciation. Overvalued currencies harm export competitively causing more imports leading to trade imbalance
How does a surplus cause global imbalances?
Surpluses in a country may mirror deficits in others. This destabilises the global economy and causes tensions
How does a surplus cause resource misallocation?
Surpluses used by excessive saving or under-consumption indicates misallocation of resources and low domestic welfare
What is a disequilibrium in the balance of payments?
Where credit exceed debit or debit exceeds credit
What are the causes of a surplus in the balance of payment?
High Export Levels
Low Import Levels
Strong Remittance Inflows
High Income from Investments
Large Capital Inflows
Exchange Rate Policies
Strong Economic Fundamentals
Favourable External Conditions
How do high export levels cause a surplus in the balance of payments?
Competitive Exports
Strong Global Demand
How do low import levels cause a surplus in the balance of payments?
Protectionist Policies and trade restrictions limit imports
Domestic Substitution means countries produce enough so rely less on imports
Weak Domestic Demand require fewer imports
How do strong remittance inflows cause a surplus in the balance of payments?
Worker remittances from working citizens increase inflows leading to a surplus
How do high income form investments cause a surplus in the balance of payments?
Foreign Investment Returns from interest, dividends, or profits, increase income flows
How do large capital inflows cause a surplus in the balance of payments?
Foreign Direct Investment create surplus in the capital/financial account
Portfolio Investments from foreigners in financial assets boost the capital account
Loans or Aid from foreign lenders or international aid add to capital inflows
How do exchange rate policies cause a surplus in the balance of payments?
Undervalued currency makes exports cheaper
Currency Pegging with fixed regimes that undervalue lead to surpluses
How do strong economic fundamentals cause a surplus in the balance of payments?
High Savings Rate run surpluses
Competitive Industries lead to consistent trade and income surpluses
How do favourable external conditions cause a surplus in the balance of payments?
Global Commodity Prices may run surpluses due to high global prices
Trade Agreements boost export access to foreign markets
What are causes of deficit in balance of payments?
Population Growth
Development Programmes
Demonstration Effect
Natural Factors
Inflation
Globalisation
Economic Growth
Recession in Trading Partners
Overvalued Exchange Rate
How does population growth cause a deficit?
To meet the needs of a growing population, it may require imports causing a deficit
How does economic growth cause a deficit?
Economic growth causes a rise in incomes, of which a proportion will be spent on imports