4 Balance Of Payments

Balance of Payments

An account of a country's payments to and leakage from the economy, including imports, exports, and other international transactions.

Deficit

Occurs when imports are greater than exports, resulting in a negative current account balance.

Current Account

Shows the value of all imports and exports over a period of time, including goods and services.

Surplus

Occurs when the value of exports is greater than imports, resulting in a positive current account balance.

Currency Appreciation

Increased value of the local currency on forex and international markets, often caused by a surplus in the balance of payments.

Currency Depreciation

Decreased value of the local currency on forex and international markets, often caused by a deficit in the balance of payments.

Inflation

General rise in price level of goods and services.

Impact of a SURPLUS

Currency appreciation : increased local supply of currency on forex and international markets

Increase in government spending : the government may use a surplus reserves to fund spending on infrastructure, social services and healthcare. This could boost long term growth but also cause inflation if not managed properly.

Growth of foreign exchange reserves : the surplus enables the central bank to accumulate larger reserves of foreign currencies. This strengthens the country’s ability to intervine on forex markets.

Reduced domestic Investment : appreciation of the exchange rate due to surplus makes export less competitive. This could reduce profitability of export firms and curb investment spending.

Impacts of a Deficit

Leakage from the economy : withdrawal of money from the local economy due to import being cheaper than local produce which results to contribution to other country’s gdp

Inflationary price rise for dependent import product : Its more expensive to import due to inflation in the other country as the product cant be produced locally

Low demand of exports due to high prices compared to other competititors.

Use of foreign currency to fund the deficit : this causes the local currency to depreciate