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    Hi I have a question about the Balance of payments.

    I don't seem to understand why the balance of payments must equal to zero? Or moreoever what exactly must equal to zero?

    As far as I have read it so far, the current account + financial and capital account = 0.

    This does not make sense to me at all. If there is a deficit in the current account, for a country, this does not mean that it has to have a surplus in its financial and capital account? Other nations do not have to invest into the country just because they have excess reserves of that countries currency due to the deficit of its current account. How does this make sense at all?
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    (Original post by Giveme45)
    Hi I have a question about the Balance of payments.

    I don't seem to understand why the balance of payments must equal to zero? Or moreoever what exactly must equal to zero?

    As far as I have read it so far, the current account + financial and capital account = 0.

    This does not make sense to me at all. If there is a deficit in the current account, for a country, this does not mean that it has to have a surplus in its financial and capital account? Other nations do not have to invest into the country just because they have excess reserves of that countries currency due to the deficit of its current account. How does this make sense at all?
    Think of it this way, if a country has a massive debt in its current account, it has to somehow finance it. The only way possible for this is for a surplus in the capital account (Or depending on the textbook, the summation of the financial and capital account).
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    (Original post by BananaPie)
    Think of it this way, if a country has a massive debt in its current account, it has to somehow finance it. The only way possible for this is for a surplus in the capital account (Or depending on the textbook, the summation of the financial and capital account).
    What if a particular country has a current account surplus. Now it has additional money let's say USD. Why does it have to spend this in investments which would lead to a capital account deficit? Why can it not just save the USD in the banks?
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    I just dont understand that if a country has a current account surplus. Why does it have to necessarily have a capital account deficit. Why can it not just keep the additional money.
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    Cuz now you have money to fund your investments, so you can use that money to research, purchase assests, etc. =]

    (Note, there are FAR more factors other than this and the previous example I posted.).

    The BOP is essentially like an accounting book, what goes in must go out, and what goes out must come in. Everything must balance otherwise something wrong. If you have a surplus, this means someone else has a deficit. There's a fixed amount of cash in this world and everything must circle around.
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    (Original post by BananaPie)
    Cuz now you have money to fund your investments, so you can use that money to research, purchase assests, etc. =]

    (Note, there are FAR more factors other than this and the previous example I posted.).

    The BOP is essentially like an accounting book, what goes in must go out, and what goes out must come in. Everything must balance otherwise something wrong. If you have a surplus, this means someone else has a deficit. There's a fixed amount of cash in this world and everything must circle around.
    Yes now you CAN use that money to reserach, purcahse assets etc, but you dont HAVE to right? So why does the BOP HAVE to equal to zero?
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    Yeah thats the theory but i dont see how it would fit with the application...

    Lets say in the beginning of a year, a country is making a current account surplus. Then, before that surplus is spend in foreign investments etc, the country is going through a deep recession adn consumer confidence is so low, that everyone decides to save their cash instead of investing it else where. Now where does this capital account deficit come from then?
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    (Original post by Giveme45)
    Yeah thats the theory but i dont see how it would fit with the application...

    Lets say in the beginning of a year, a country is making a current account surplus. Then, before that surplus is spend in foreign investments etc, the country is going through a deep recession adn consumer confidence is so low, that everyone decides to save their cash instead of investing it else where. Now where does this capital account deficit come from then?
    Edit: It's highly unlikely for a country to experience a current account surplus and be in a recession at the same time. Also note that the money you get from a current account surplus can be used to purchase other countries bonds (which hold value) and still allow money to circulate around. This causes a negative effect on ur financial account. Also note that just because confidence in your economy is low, doesn't mean you lose confidence in economies overseas.
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    (Original post by BananaPie)
    Edit: It's highly unlikely for a country to experience a current account surplus and be in a recession at the same time. Also note that the money you get from a current account surplus can be used to purchase other countries bonds (which hold value) and still allow money to circulate around. This causes a negative effect on ur financial account.
    Yes yes I understand the "can". I know that it is likely that the BoP is equal to zero etc.

    But why "must" it equal to zero?
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    (Original post by Giveme45)
    Yes yes I understand the "can". I know that it is likely that the BoP is equal to zero etc.

    But why "must" it equal to zero?
    Because if it doesn't equal to 0 then it means money is missing or somehow money has been magically produced.
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    (Original post by BananaPie)
    Because if it doesn't equal to 0 then it means money is missing or somehow money has been magically produced.
    See, this I don't agree with. It is theoretically possible that a country has a surplus in current account, and decides to save all of the surplus instead of investing it.
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    It doesn't always have to equal zero when you are looking at trade on an international scale- I've just done my dissertation on medieval English and Scottish economics, and England actually ran quite a high balance of payments surplus, which made it extremely wealthy. They exported more in value than they imported, which brought absolutely loads of cash into the country, and drained it from its trading partners.

    But on the scale I think you mean, then it would be as others have said- cash can't simply go AWOL. It has to come and go from somewhere, and it needs to be balanced.
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    (Original post by kittyb99)
    It doesn't always have to equal zero when you are looking at trade on an international scale- I've just done my dissertation on medieval English and Scottish economics, and England actually ran quite a high balance of payments surplus, which made it extremely wealthy. They exported more in value than they imported, which brought absolutely loads of cash into the country, and drained it from its trading partners.

    But on the scale I think you mean, then it would be as others have said- cash can't simply go AWOL. It has to come and go from somewhere, and it needs to be balanced.
    You are talking about a balance of trade surplus, not balance of payments surplus it seems. But on all the other sites it states that BoP must always equal to zero, which i cannot seem to understand. And the logic "it has to come from somewhere, and it needs to be balanced" doesnt really explain it imo. Since, as i stated i think that It is theoretically possible that a country has a surplus in current account, and decides to save all of the surplus instead of investing it. So how is this explained?
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    The logic " the money has to come from somewhere ". Doesn'T work to explain this since the BoP is a yearly thing. So theoretically the money could have come from the savings from previous years. Which would not be recorded in the new BoP from this year.
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    A country doesn't simply "save" money. THEORETICALLY, you're correct. I have a surplus in income, I'll just save it. Reality doesn't work that way. I might use that money to purchase bonds and receive an even greater return in the long-run. And the argument that money can come from previous savings isn't valid. You don't simply hand off money to another country and then it's gone forever. The world economy involves complex transactions between individuals and it'll eventually come back to you in some shape.
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    (Original post by Giveme45)
    You are talking about a balance of trade surplus, not balance of payments surplus it seems. But on all the other sites it states that BoP must always equal to zero, which i cannot seem to understand. And the logic "it has to come from somewhere, and it needs to be balanced" doesnt really explain it imo. Since, as i stated i think that It is theoretically possible that a country has a surplus in current account, and decides to save all of the surplus instead of investing it. So how is this explained?
    Well, no, the applicable term is still "balance of payments", but with specific reference to trade, as the term itself is simply the record of transactions between one country and the rest of the world.

    But as for your main question (before we digress ), if a country allowed for its surplus to stagnate, rather than re-invest it, (I believe) it would end up losing money. You need to keep re-investing to keep up with inflation and to ensure the books keep balancing, so saving isn't as much of an option. Also, if a country decided to not dip into the money it brought in, how would goods etc from abroad be purchased?
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    (Original post by BananaPie)
    A country doesn't simply "save" money. THEORETICALLY, you're correct. I have a surplus in income, I'll just save it. Reality doesn't work that way. And the argument that money can come from previous savings isn't valid. You don't simply hand off money to another country and then it's gone forever. The world economy involves complex transactions between individuals and it'll eventually come back to you in some shape.
    #
    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.
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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.
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    (Original post by kittyb99)
    Well, no, the applicable term is still "balance of payments", but with specific reference to trade, as the term itself is simply the record of transactions between one country and the rest of the world.

    But as for your main question (before we digress ), if a country allowed for its surplus to stagnate, rather than re-invest it, (I believe) it would end up losing money. You need to keep re-investing to keep up with inflation and to ensure the books keep balancing, so saving isn't as much of an option. Also, if a country decided to not dip into the money it brought in, how would goods etc from abroad be purchased?
    Yes I see that is it realistic that the BoP would be equal to zero. But I want to understand why it, from a logical point of view, equals to zero (this means in all the theoretic situations it is equal to zero). Do you know an explanation which does not refer to the fact that money comes from somewhere, as this isnt valid as bop is remeasured each year. 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?
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    (Original post by Giveme45)
    Yes I see that is it realistic that the BoP would be equal to zero. But I want to understand why it, from a logical point of view, equals to zero (this means in all the theoretic situations it is equal to zero). Do you know an explanation which does not refer to the fact that money comes from somewhere, as this isnt valid as bop is remeasured each year. 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?
    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.
 
 
 
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