Balance of payments is a summary of all economic transactions between a country and all other countries for a specific time period
Brianna Mortel
Balance of payments is “a summary of all economic transactions between a country and all other countries for a specific time period, usually a year” (Gwartney et al, 2018). A change in the country’s balance of payments (such as a credit or a debit) creates fluctuations in the exchange rate between the country’s currency and foreign currencies. This is also visa versa. If the exchange rate changes, it creates a fluctuation to the balance of payment. This is due to a floating-rate exchange system. This then affects the purchasing power of a country, which is the value of their currency as expressed by the number of goods or services their money can buy. If the exchange rate is high, the purchasing power is lower.
A trade deficit is “the situation when a country’s imports of goods and services are greater than its exports” (Gwartney et al, 2019). When a country is bringing in more goods and services, their balance of payments is in deficit and the capital account will be in surplus. Trade deficit can be a good or a bad thing depending on how the country is using their funds. For example, if a country is using these purchased goods and services to be innovative and produce new products, a trade deficit is a good thing. It increases productivity by providing jobs and future earnings for the country. Furthermore, if the country is known to have good economic standing, a trade deficit shows that country has new innovative ideas brewing and provides confidence to investors to fund the economy and these new ventures. If the purchased goods and services are used for unproductive ventures or to fund a current gap, then the trade deficit is a bad thing. “For example, if the United States continued to run large deficits that push the federal debt to high levels, the confidence of both domestic and foreign investors would diminish. This would lead to a decline in the capital inflow and a reduction in the trade deficit” (Gwartney et al, 2018). For the U.S. economy, I am for trade deficits, so long as it’s being used properly.
Resources
Gwartney, J. A., Stroup, R. L., Sobel, R. L., & Macpherson, D. A. (2018). Macroeconomics: Private and public choice (16th ed.). Retrieved from https://www.cengage.com
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