Balance of Payment

Topics: Balance of payments, Current account, Investment Pages: 6 (757 words) Published: November 23, 2014
Question 1

a.

The strongest economy is USA (GDP per capita, $PPP; 48,110), second strongest economy is UK (35,600), follow by Eurozone economy (35,280) and the weakest economy is China (8,400). For compare economies performances I used indicator of GDP per capita with $PPP (Purchasing power parity) because every economy have differences in population and in purchasing power parity. For example; China have higher population than USA and that mean more working people in economy (Reason for per capita). Also living cost and price of standard basket of goods and services is higher in USA than in China ( Reason for PPP).

b.
When I compared ranking of economies in table 1.(2011) and table 2. (2010) there is a difference in ranking. The strongest economy is still USA but second is Eurozone follow by UK and the weakest is China. When you compared performances of these four economies with table 1. and 2. all data indicators for 2010 are worse than for 2011. Some economies growth up faster than others.

Question 2
a.
The current account and the capital account constitute a country's balance of payments. The capital account indicate net change in ownership of national assets. The capital account is the net result of private and public international investments flowing in and out a country. The capital account comprise FDI (foreign direct investments), financial derivatives, portfolio and changes in the reserve account (Santos,2013). The current account comprises the balance of trade (Export – Import), net current transfers and net income. The current account balances is affected by several factor; its exchange rate, forex reserves, inflation rate, trade policies, competitiveness and others(Santos, 2013). Theoretically, the balance of payments should be in balance. However when an economy has positive capital accounts, the country's debits are more than its credits. This is generally means that a current account is in deficit. An inflow of money indicate that the recurrence on an investment is a debit on the current account. Consequently the economy is using world savings to meet its local investment and consumption demands, It is a net debtor to the rest of the world (Heakal, 2013).

b.
The external sector of an economy bequeaths to the international transactions that all residents of a country (private and public sector) lead with the rest of the world. It is demonstrated on its current account or its opposite capital account(Santos, 2013). The public sector of an economy concerns providing various government service. The public sector includes such services as the police, military, public roads, public transit, education, healthcare, etc. The private sector of an economy runs by private individuals or groups and this part of economy is not controlled by state. The private sector includes personal sector (households) and corporate sector (companies). The private sector contains all for profit businesses which are not operated or owned by the government. The connections between different sector of an economy are demonstrated in the circular flow of income. This is a neoclassical economic model describing how money flows throughout an economy. For better understanding how the balances of economics sectors relate to each other I decided use diagram. (source:https://commons.wikimedia.org/wiki/File:Circular_flow_of_income.jpg)

c.
The main difference between China and US is that China is more export country than US. And US is more import country than China. There are several reason for that such as cheaper labour, cheaper land, less tax, etc. This has the effect that US's current account is in the combined deficits. China and other export countries made the bulk of the world's surplus. Chine and other export countries are important surplus counterweights to the US deficits. The public sector of China have tendency more spending (build motorway, schools, bridge etc.), also saving to...

References: Santos C. with Higginson M., Himmelweit S., Howells P., Lowe J., Mackintosh M., Morgan W., Parris S., Simonetti R., Stone H. and Trigg A. (2013) Running the economy
Heakal R., (2013) Balance of payment, www.investopedia.com
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