4.1.7

• components of balance of payments:

  • current account
  • capital and financial account
• financial account consists of:

  • FDIs
  • portfolio investment
  • other investment
• current account deficit: value of imports exceeds value of exports
• higher consumer spending and demand for foreign goods cause a current account deficit
• higher income outflows such as interest and dividends abroad can cause a current account deficit
• appreciation in domestic currency makes imports cheaper and exports more costly - leads to current account deficit
• low competitiveness of domestic industries causes current account deficit
• value of exports exceeds value of imports leads to current account deficit
• low domestic consumption and high savings rate leads to current account deficit
• large inflow of income due to foreign investment leads to current account deficit
• depreciation in domestic currency makes exports cheaper and imports expensive - leads to current account deficit
• competitive domestic industries - leads to current account deficit
• measures to balance current account:

  • changes in exchange rate
  • demand side policies - monetary/fiscal
  • supply side policies - improve export competitiveness
  • protectionism
  • currency control - governments can limit access to foreign currency
• global imbalances measured by:

  • imbalances of the currency account
  • imbalances in assets/borrowing from abroad
• financial crisis is a build up of debt for countries in a deficit
• correcting global trade imbalances:

  • supply side policies
  • protectionism
  • boosting domestic demand