Balance of Payments

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BOP isn't theoretically 0, it actually is 0 in reality.

True Current Account - (capital + financial account) may not equal 0, but there are fixers in place (I forgot what they're called) to ensure BOP is 0 in reality.

Also, in turn after you've used ur savings to purchase goods from another account. That money ends up as that other person's income, and that person might have invested back in your country thus returning money back to the country and being recorded on the BOP.

Yes but from a theoretical point it must always be equal to zero as well, which means that there must be a strict logic behnid it which I want to understand!

Can you provide a pure logical in-depth explanation of this situation (without referring to "mights" or "cans")? : Let's take China and USA. In the beginning of year 2014, usa imports a lot frmo china without exporting anything to china. So china has a huge current accoutn surplus. Now if it decides NOT to invest to USA, then HOW does its BoP balance?

Reply 21

Hi, How are you ?

Original post by Giveme45

#
It's not an argument. And it is valid. The bop is a yearly thing. So in the begining of 2013, the savings from 2012 can be used to purchase goods from a nother country which would then be recorded in the current account. The thing is, the whole thing is THEORETICAL. And THEORETICALLY, BOP must equal to zero! I want to understand why this is so, (without the "the money must come from somewhere", since this is not a valid argument). Thank you very much btw so far, appreciate ur help.

Hi, think of it this way. if a country has a BOP surplus, a country some where has to have a BOP deficit, as to have a BOP surplus for example, you have to have a large export ( which means that other country has a large import deficit as they import a lot form the exporter) so in the long run, the country with the BOP surplus would lose out as the the country with the BOP deficit would stop importing, to stop their BOP from worsening for example, not benefiting anyone. if everyone was in equilibrium, i.e 0, then trade can happen in the long run with no problems, benefiting everyone.
:smile:

Reply 22

Giveme45

Original post by BananaPie

If China doesn't re-invest back in USA then the U.S. economy will crash. It will no longer be able to purchase anything and everyone would go bankrupt, unemployment would rise, everything will be in chaos. China will buy bonds from U.S.A. to prevent a world economy collapse.

Why would it crash, it bought good and services from china and paid USD (or Yuan). That's all. It doesn't even have debt in this case.

Reply 23

Giveme45

Original post by Hi, How are you ?

My issue is that it is impossible to have a BOP surplus or deficit. And I want to know why.

Reply 24

BananaPie

Original post by Giveme45

Why would it crash, it bought good and services from china and paid USD (or Yuan). That's all. It doesn't even have debt in this case.

Because then it wouldn't have money to continue importing, pay wages, and everything. You're going to suck all of the money out of the U.S. if you don't invest back! xD.

Reply 25

Giveme45

Original post by BananaPie

Because then it wouldn't have money to continue importing, pay wages, and everything. You're going to suck all of the money out of the U.S. if you don't invest back! xD.

What if it simply stops importing and just continues its economy from this point on? There's stil la lot of money circulating around in the U.S which it can make use of!

Reply 26

BananaPie

Original post by Giveme45

What if it simply stops importing and just continues its economy from this point on? There's stil la lot of money circulating around in the U.S which it can make use of!

Then China, who's heavily reliant on export-growth with the U.S. being it's main importers, will be like "Holy crap, our growth is decreasing by A MASSIVE percentage". Pretty sure China doesn't want that. xD.

Reply 27

Giveme45

Original post by BananaPie

Okay yeah thats true but as i said this is once again only practical reasoning but not logical. So why does a surplus in current accoutn directly mean a deficit in capital account? at the same time?

Reply 28

Hi, How are you ?

Original post by Giveme45

My issue is that it is impossible to have a BOP surplus or deficit. And I want to know why.

It isn't impossible, i'm pretty sure about that. it is better to have a BOP at 0, for those reasons stated.
=).

(edited 11 years ago)

Reply 29

Giveme45

Original post by Hi, How are you ?

It isn't impossible, i'm pretty sure that it is better to have a BOP at 0, for those reasons stated.

Wikipedia and all textbooks state that it HAS and MUST be equal to 0.

Reply 30

Sheldon Cooper10

If a country has a recession then it has a deficit and if It has a surplus it pays back the extra money which it borrowed and it is therefore assumed that during the business cycle a recession will always be cancelled out be a boom and that when the economy is at the trend rate of growth on the economic cycle then exports and imports are balanced. It would always be balanced if we had a better government not spending more than it takes in and that follow this rule of thinking. Why the neg rep?