Kennedy and the Balance of Payment
Kennedy and the Balance of Payment
Assignment 1- FINA6676-2
1/30/2014
Hang Pham- A00366703
What is President Kennedy’s U.S. balance of payment problem?
In the 1960s, the United States was experiencing the balance of payment problem when its trade balance was in a substantial deficit, the US dollar was under an attack and a massive amount of gold flew out of its official reserve. Such issues in the balance of payment if exist for a long time can be a threat to the whole economy because balance of payment closely interacts with key macroeconomic variables such as GDP, exchange rates, interest rates and inflation rates. However, it was not an easy task for the Kennedy government to solve the balance of payment problem as the U.S commitments with the global trade liberalization mission and its position on the Bretton Woods system put it between a rock and a hard place.
Where did the problems originate?
It can be said that the U.S. balance of payment problem was the cost it has to pay to gain political and economic influences over its allies. The issue originated from U.S. post-war attempts to liberalize the world trade even if it required the sacrifice of specific American economic interests. However, liberalizing trade barriers process took longer time than expected; and as a result, the costs associated were growing out of control.
What are the roles of current account, capital and financial accounts, and the official-reserves account in the balance of payment problem?
All main accounts of the U.S. balance of payment incurred problems and among them, the current account, specifically the balance of trade deficit, contributed the largest part to the deterioration in the US balance of payment. There were several reasons for the balance of trade deficit. Firstly, when U.S. imposed policies to liberalize trade barriers, import to the country increased. However, these policies did not help to increase exports because U.S trading partners still
Assignment 1- FINA6676-2
1/30/2014
Hang Pham- A00366703
What is President Kennedy’s U.S. balance of payment problem?
In the 1960s, the United States was experiencing the balance of payment problem when its trade balance was in a substantial deficit, the US dollar was under an attack and a massive amount of gold flew out of its official reserve. Such issues in the balance of payment if exist for a long time can be a threat to the whole economy because balance of payment closely interacts with key macroeconomic variables such as GDP, exchange rates, interest rates and inflation rates. However, it was not an easy task for the Kennedy government to solve the balance of payment problem as the U.S commitments with the global trade liberalization mission and its position on the Bretton Woods system put it between a rock and a hard place.
Where did the problems originate?
It can be said that the U.S. balance of payment problem was the cost it has to pay to gain political and economic influences over its allies. The issue originated from U.S. post-war attempts to liberalize the world trade even if it required the sacrifice of specific American economic interests. However, liberalizing trade barriers process took longer time than expected; and as a result, the costs associated were growing out of control.
What are the roles of current account, capital and financial accounts, and the official-reserves account in the balance of payment problem?
All main accounts of the U.S. balance of payment incurred problems and among them, the current account, specifically the balance of trade deficit, contributed the largest part to the deterioration in the US balance of payment. There were several reasons for the balance of trade deficit. Firstly, when U.S. imposed policies to liberalize trade barriers, import to the country increased. However, these policies did not help to increase exports because U.S trading partners still