Definition Of Balance And Imbalances (Deficit And Surplus) In The Current Account Of The Balance Of Payments
Economics notes
Definition Of Balance And Imbalances (Deficit And Surplus) In The Current Account Of The Balance Of Payments
➡️ Balance of payments: records all economic transactions between a country and the rest of the world
➡️ Current account balance: the difference between a country's total exports and imports of goods and services
➡️ Capital account balance: the difference between a country's total inflows and outflows of capital, such as foreign direct investment, portfolio investment, and borrowing and lending of funds.
What is the current account of the balance of payments and how does it relate to balance and imbalances in the economy?
The current account of the balance of payments is a record of a country's international transactions in goods, services, and income. It includes exports and imports of goods and services, as well as income earned from investments and transfers. A balance in the current account means that a country's exports and income from abroad are equal to its imports and income paid to foreign entities. An imbalance, such as a deficit, means that a country is importing more than it is exporting and is paying out more income to foreign entities than it is receiving.
What are the causes and consequences of a current account deficit?
A current account deficit can be caused by a variety of factors, such as a lack of competitiveness in a country's exports, high levels of domestic consumption, or a strong currency that makes imports cheaper. The consequences of a current account deficit can include a decrease in a country's foreign exchange reserves, a decline in the value of its currency, and an increase in its debt to foreign entities. It can also lead to a loss of confidence in the economy, which can further exacerbate the deficit.
How can a country address a current account deficit?
There are several ways a country can address a current account deficit. One approach is to increase exports by improving competitiveness through measures such as investing in infrastructure, reducing trade barriers, and promoting innovation. Another approach is to reduce imports by implementing policies such as import tariffs or quotas. A country can also address a current account deficit by reducing domestic consumption through measures such as increasing taxes or reducing government spending. Finally, a country can seek to attract foreign investment to increase its income from abroad and improve its balance of payments.