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“The following video. We will look at the nconcept of equilibrium in the balance of of payments. We will discuss causes of disequilibrium with na primary focus on the current financial accounts when we discuss disequilibrium in the balance nof payments. We are generally discussing the state of one of the accounts.
The current naccount. The capital account or the financial account. We saw in the previous video. Why the balance nof payments always balances.
But we need to examine the factors that cause one of the naccounts to tend towards disequilibrium or where there is surplus or a deficit in the naccount in order to achieve equilibrium. The debits nand credits on the specific accounts of the balance of payments must be equal in this video. We will focus mostly on the nfactors that cause disequilibrium in the current account and will dedicate the remaining time nto..
The financial account since the capital account is a minor concern nwe will focus on the previous two in the current account export revenue. Should nequal import expenditure or an imbalance exists. There could be a variety of reasons that export nrevenue is greater than import revenue and vice versa. If a country s export revenue is less than nits import expenditure.
The country is said to have a trade deficit. Which could also indicate na current account deficit to determine whether there is absolutely a ncurrent account deficit. We need to also factor in current transfers and income as well. If the export revenue is greater than import nexpenditure.
The country is said to have a trade surplus. Which could also indicate a ncurrent account surplus to determine whether there is absolutely a ncurrent account surplus. We need to also factor in current transfers and income as well the first series of causes of disequilibrium nwill focus on the current account they will be highlighted in green discussion of factors that affect the financial naccount will be highlighted in amber as an economy experiences economic growth nand its citizens become richer..
There is a tendency to import more moving towards a ngreater amount of money spent on imports than is received on exports a decrease in economic growth or a recession. Nwill lead to a decreased demand for imports resulting in a tendency towards a current naccount surplus and away from the deficit. If the price level rises in a country relative nto its trade partners. It makes its exports less attractive and decreases the likelihood nof exporting.
This can lean the current account towards na deficit depending on the extent of the change of the price level currency fluctuations have similar effects. If the currency. Appreciates it is likely nto. Reduce export revenue and increase import expenditure resulting in a tendency towards na current account deficit.
If the currency depreciates. It is likely nto increase export revenue and decrease import expenditure resulting in a tendency towards na current account surplus trade policies could impact. The current account nand..
The financial account. They could impact the current account by limiting nor increasing trade with other countries this could also positively or negatively influence nthe level of foreign investment into a country if trade policies encourage more free trade nit may lead to greater import expenditure yet attract greater foreign investment. The opposite also holds true if trade policies are protectionist in nature nit may lead to less import expenditure and deter foreign investment foreign investment will increase if an economy nis attractive to foreign investors this could be due to supply side changes npolitical stability and an overall level of confidence in the government and economy. The united states runs a current account deficit nbut attracts a lot of foreign investment which results in a financial account surplus finally we will consider the consequences nof disequilibrium.
This list is not exhaustive. But demonstrates nthe impact on the domestic and external economy. Increased reliance on imports drives up the nrisk of imported inflation. If a country imports.
Raw materials and commodities nand is reliant upon imports as the primary source. They are vulnerable to fluctuations nin. Their prices..
And in the exchange rate for better or for worse over reliance on trade partners as export nmarkets. If a country has a large export market its neconomy s performance is largely tied to the performance of its trading partners if its trading partners suffer economic downturns nthis will have a significant effect on a country s economy this could signal a weaker economy and deter nforeign investment. If a country is seen to consistently run a ncurrent account deficit. It may be a sign that consumers and businesses are continuing nto opt for goods and services produced outside of the country.
If this continues for the long run it may nsignal little confidence in domestic production and choice deterring foreign investors from nexploring investment opportunities that wraps us this video on the balance of npayments and i hope you ve been able to better understand the conditions of disequilibrium nits causes and consequences. If you have any questions or comments leave nthem below or email me at enhancetuition gmailcom or tweet me enhancetuition ” ..
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