Intro: The key point to note about the balance of payments is that they always balance. Whenever a country runs a current account deficit it does so by accumulating financial liabilities, or drawing down its own assets. When a country runs a current account surplus, it accumulates overseas assets or pays down its own liabilities.…
Intro: Rather than being merely a reflection of import or export strength, a country’s current account picture tells a story about the balance of savings relative to investment. All else equal, the higher the level of savings in an economy, the more positive the current account picture. If a country runs a current account surplus…
Intro: While a current account surplus is preferable to a current account deficit all else equal, little information can be gleaned from the current account alone. The important point to note is the country’s savings rate. As explained previously in ‘The Current Account Reflects the Saving-Investment Relationship’ a current account surplus reflects either a low…
Intro: Persistent current account deficits result in the build-up of net liabilities in the international investment account. NIIP deficits and surpluses tend to be self-reinforcing as the country earn less on its assets than it has to pay on its liabilities, resulting in an income account deficits. This in turn results in a further build-up…
Intro: Balance of payments crises are loosely defined by sharp adjustments in imports in response to intense currency depreciation resulting from foreign investors withdrawing assets from a country reliant on overseas borrowing. The difference between a balance of payments crisis and a mere external rebalancing tends to depend on the economic damage caused, which tends…
Intro: Artificially weakening a country’s currency may appear to be beneficial for economic growth as it often leads to higher exports in local currency terms. However, while exports as a share of GDP may rise due to higher profitability in that sector, this is typically more than offset by the losses in the domestically-focused industries,…
Intro: To accumulate foreign reserves, central banks must buy dollars, weakening the value of their currency to the benefit of foreign importers. While there is no doubt that such measures by trade surplus countries such as China have undermined low-end manufacturing in deficit countries such as the US, this has been more than offset by…
Intro: When economists forecast economic growth they tend to put a lot of emphasis on external demand, but beyond the short term, its impact on growth is limited. it is important to keep in mind that even if a country witnesses an increase in demand from overseas the resources needed to raise output must come…