what happends to our BoP... (1 Viewer)

[darshil]

what happens to our BoP...

Hey everyone, i dont feel too confident on answering these questions. Can you tell me if i am on the right track?

Question: What happens to our two balance of payments if (assuming ceteris paribus):
i) exports fall
My answer lacking in confidence: As X falls so does the balance of goods and services in the current account. This leads to a bigger CAD as there are less exports (credits) Also income and hence the eco. growth of the country falls. This means that the K&F account will fall due to less attraction of savings from abroad (because of low eco growth and low interest rates)
ii) exports rise
Another answer lacking in confidence: As X increases the balance of goods and services increases and hence reduces the extent of the CAD. This also means there is increased eco growth attracting more savings from abroad. This is due to increased confidence and oppurtuiny in AUS.
iii) income debit rises
i honestly dont know
iv) capital inflow increases
i honestly dont know

forever indebted
thanks for it all

 

[darshil]

thanks for the reply man, it really helped

 

[Ticthach]

Sorry to bring this thread back to life but:

i) If the deficit in the current account is increasing/deteriorating, doesn't that mean that the capital and financial account's value should increase because a deficit in the the current account = a surplus in the K/F account which then equals to 0?

 

[gnrlies]

Sorry to bring this thread back to life but:

i) If the deficit in the current account is increasing/deteriorating, doesn't that mean that the capital and financial account's value should increase because a deficit in the the current account = a surplus in the K/F account which then equals to 0?

You have pointed something very important out.

No matter what CAD and K&FA sum to zero, so therefore you cannot have as darshil wrote a fall in exports producing a simultaneous fall in the K&FA over the same period (ceteris paribas).

Economics is full of things called feedback loops. this is essentially a situation where changing one variable, changes another variable, which changes the original variable. E.g. an increase in inflation tends to result in an increase in wages which further increases inflation. These feedback loops are incredibly important within economics and are studied in dynamic stochastic models.

What darshil is writing about is such a feedback loop. I.e. a fall in exports will also tend to reduce the attractiveness of investment in Australia. However this feedback loop will not occur within the same period as the fall in exports. This is an important result as it allows our traditional story of balance (sum to zero) to be true as well as allowing intuitive approaches such as the one taken by darshil to be taken.

Of course what would happen is that a fall in exports will require a capital inflow to pay for those goods (i.e. you dont get something for nothing), however in the subsequent period as foreign investors feel that exports are falling, they may reduce their investment level. in order to maintain balance, we may have to import less within that period. Of course this is just a conjecture, we dont really know that this is what will happen, but I am just giving a situation where it is possible. Usually these kinds of feedback loops are very random and can tend to be unpredictable.

 

[darshil]

Of course what would happen is that a fall in exports will require a capital inflow to pay for those goods (i.e. you dont get something for nothing)

Hey gnrlies thanks for the continuous support. What i wrote before, is that a right answer? and if not, what should I say? I obviously should have thought about BoP=0.

PS:

Of course what would happen is that a fall in exports will require a capital inflow to pay for those goods (i.e. you dont get something for nothing)
What does that mean? I dont get it :S

Thanks yet again!

 

[gnrlies]

Of course what would happen is that a fall in exports will require a capital inflow to pay for those goods (i.e. you dont get something for nothing)

Hey gnrlies thanks for the continuous support. What i wrote before, is that a right answer? and if not, what should I say? I obviously should have thought about BoP=0.

PS:

Of course what would happen is that a fall in exports will require a capital inflow to pay for those goods (i.e. you dont get something for nothing)
What does that mean? I dont get it :S

Thanks yet again!

Ok well it could be that as a country loses its international competitiveness and is subsequently exporting less, foreign investment may fall. It may even be reduced foreign investment that leads to the fall in exports. But generally it probably would not be the main thing you would say in context to the CAD as it is more a long run effect rather than an occurance within a single period of the BOP. I.e. you are looking at something that would occur over a series of BOP figures.

The whole idea of having to have a capital inflow to pay for a CAD (no free lunch) is a simple one. Consider your own household. If you spend more than you earn you have to pay for it somehow. Usually that will require a loan (perhaps using a credit card). So if you have earnt $100 in a week and you spend $120 you have to get the $20 from somewhere. It is an accounting identity.

 

[darshil]

gothcya buddy, no free lunch (=, thanks for everything!