Exam Review Blog Post
January 19, 2011 § Leave a comment
From NOV.2009 Paper 1 IB Exam: Explain 2 factors that might negatively affect a country’s current account in its balance of payments.
Demands of Question
- Define: Balance of Payment, Current account
- State the 2 factors that might negatively affect a country’s current account and elaborate
The balance of payments are a nation’s balance of payment. It is the sum of all transactions that take place between its residents and the residents of all foreign nations. These transactions include merchandise exports and imports, tourist expenditures, and the sale and purchase of financial and real assets abroad, including stocks, real estate, government bonds, etc. The current account is the subdivisions of the Balance of Payments account. Current account summarizes a country’s trade in currently produced goods and services. Basically, it is found by adding all transactions (expenditures on imports plus income from exports) in the current account. If a country spends more on imports than it earns from exports, it is said to have a current account defiict; if a country earns more from its exports than it spends on imports, it is said to have a “current account surplus” or a “trade surplus”.
- The cost of production (land, labor, capital, taxes, incentives, etc.) in the exporting economy vis-à-vis those in the importing economy;
- The cost and availability of raw materials, intermediate goods and other inputs;
- Exchange rate movements;
- Multilateral, bilateral and unilateral taxes or restrictions on trade;
- Non-tariff barriers such as environmental, health or safety standards;
- The availability of adequate foreign exchange with which to pay for imports; and
- Prices of goods manufactured at home (influenced by the responsiveness of supply
In addition, the trade balance is likely to differ across the business cycle. In export-led growth (such as oil and early industrial goods), the balance of trade will improve during an economic expansion. However, with domestic demand led growth (as in the United States and Australia) the trade balance will worsen at the same stage in the business cycle.
Since the mid 1980s, the United States has had a growing deficit in tradeable goods, especially with Asian nations (China and Japan) which now hold large sums of U.S debt that has funded the consumption. The U.S. has a trade surplus with nations such as Australia. The issue of trade deficits can be complex. Trade deficits generated in tradeable goods such as manufactured goods or software may impact domestic employment to different degrees than trade deficits in raw materials.
Economies such as Canada, Japan, and Germany which have savings surpluses, typically run trade surpluses. China, a high growth economy, has tended to run trade surpluses. A higher savings rate generally corresponds to a trade surplus. Correspondingly, the U.S. with its lower savings rate has tended to run high trade deficits, especially with Asian nations.
Related PPT Slides: