Balance of Payments

1
Balance of Payments

• Surplus Deficits.

2
Does a BoP Deficit cause problems?

• It depends on the size and nature of the deficit!
• The larger the deficit, over a longer period of
  time the greater the problems will be!
• If its cheap imports an increase in M???
• If its the UK not being competitive and there is
  a fall in X???

3
Short run V long run deficit!

• In the Short run.
• A deficit might mean that UK households have a
  better standard of living

• In the Long run
• A deficit might cause UK businesses to suffer,
  rising unemployment . and falling standards of
  living!

4
Curing BoP deficit

• Deflation
• Direct controls
• Devaluation

The 3 Ds
All have issues with use!
5
Can a surplus BoP cause problems?

• A surplus suggests lots of economic success
• Exporting more than Importing! Again it depends
  on the size of the surplus!
• And if one country is more successful than
  others then this can cause other countries to
  act to reduce their deficit and use direct
  controls!
• Surplus can cause inflation as an increase in X
  an injection outward shift in AD!

6
Curing BoP surplus

• Reflation
• Remove import controls
• Revaluation

The 3 Rs
All have issues with use!