A discussion on why the balance of payments and the current account deficit is important

Without drawing conclusions about which is better from a policy standpoint, it is possible to use economic analysis to decipher the practical implications of various configurations in the balance of payments.

In the current account, goods, services, income and current transfers are recorded. There were attempts to repair the system of fixed exchanged rates over the next few years, but these were soon abandoned, as were determined efforts for the U.

While the Current account deficit of recent years has received much media attention, there is little public awareness that this trade deficit is accompanied by a surplus in the Capital account.

Policy actions taken to correct or change levels of imports and exports invariably restrict trade flows. In the Euro, there is no scope for uncompetitive countries to devalue the exchange rate, therefore the imbalances can be large.

Importance of Current Account Deficit

This so-called trade surplus necessarily means a capital account deficit — an increase in U. Russia was unable to pay its foreign debt back in However his ideas were not accepted by the Americans at the time. Absent changes in official reserves, the current account is the mirror image of the sum of the capital and financial accounts.

Owners and workers in export industries really like this situation. In practical terms, if Americans import foreign products, then we export our financial assets to pay for them.

Problems of a current account deficit

A developed country may have adverse balance of payments due to massive assistance given to developing countries. American goods and services are competitive and desired in world markets; foreigners are willing to spend their money on our products.

Current account

The biggest deficit occurred in the Lawson boom of the s when consumer spending grew sharply. Foreign ownership of assets. Others such as Martin Wolf saw risks of tensions further escalating and advocated that coordinated action for addressing imbalances should be agreed on at the November G20 summit.

This can lead to a decline in living standards and lower confidence for investment. See Visual 2 in download file attached above.

The report also compares countries on services balance, exports of services, import of services, goods balance, export of goods and imports of goods in billions of US dollars. For example, the US probably has less reason to be concerned about a current account deficit. It presents the international financial position of the country.The most important part of the current account in most countries is the balance of trade in goods and services.

If deficit, there is an excess supply of the currency is in FOREX. Supplied>Demand. Dec 18,  · A balance of payments deficit means the country imports more goods, services and capital than it exports.

It must borrow from other countries to pay for its. To interpret balance of payments data properly, it is necessary to understand how the balance of payments account is constructed.

[1] [2] These transactions include payments for the country's exports and imports of goods. The balance of payments is divided into three parts: the current account, the capital account and the financial account.

The current account includes trade-in merchandise and services between domestic and foreign producers and consumers, income receipts and unilateral transfers. The current account balance is one of two major measures of a country's foreign trade (the other being the net capital outflow).

A current account surplus indicates that the value of a country's net foreign assets (i.e. assets less liabilities) grew over the period in question, and a current account deficit indicates that it shrank. Importance of Balance of Payments for a Country – Explained! However, the longer the balance of payments deficit continues, the more it would imply some fundamental problems in that economy.

ADVERTISEMENTS: Similarly, a favorable balance of payments should not always make a country complacent. A poor country may have a favorable balance.

A discussion on why the balance of payments and the current account deficit is important
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