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Thursday, May 6, 2010
Foreign Exchange & BOP - HBL (S32)
Referring to HBL activity #2, respond to the question below: Why might some countries have a sustained surplus or deficit on their current account? Refer to specific countries whenever possible.
China always has a current account surplus as she refuses to revalue her exchange rate and keeps it undervalued, hence creating conflicts with the US. By keeping the currency undervalued, it will cause foreign imports to be more expensive relative to domestic goods (assume Marshall lerner's condition holds) Hence, it encourages domestic consumers to purchase domestically produces goods and demand for foreign imports drop, causing M to decrease. This is especially significant for China who has a huge domestic consumer market. With a lower currency, exports (X) will rise (assuming Marshall Lerner's condition holds). This is because China's export markets will import more of China's cheaper exports. Hence China's overall (X-M) increases and current account improves (Surplus). On the contrary, the USA has been having a current account deficit from 1998 to 2010. This is because the US domestic markets spendddddddd alot, hence resulting in large imports (M). Furthermor, The growth of China's current account surplus has been a key counterpart to the widening US deficit as were surpluses of other Asian countries from 2001 to 2005 and surpluses of oil-exporting countries (including Russia), especially from 2005 through mid-2008. It could also be due to US large fiscal deficit,(10 percent of GDP instead of adjusting to 2 percent) because of uncontrolled spending on health care and Social Security. Hence this lead to a large M causing (X-M) to go into a deficit
Asians are generally thrifty and Americans, generous. China's cheap Yuan will lead to US consumers finding Chinese goods relatively cheaper, thus the qty dd for M increases. US firms find imported raw materials from China cheaper with this undervaluation and switch to buy from China to lower cost of production. Hence, China's X revenue increases further. On the other hand, US exports will be relatively more exp for the CHinese and hence there will be a drop in China's qty dd for US X. US X expenditure will decrease and China's M also decreases. (X-M) for China improves. Trade surplus would have caused the Yuan to appreciate but due to China's control of the exchange rate, it has created an artificial comparative advantage hence the increase in its current acct balance from 29.3 billion in 1998 to 297.1 billion in 2009. While there is a decreasing trend for US's current acct balance.
UK has a sustained deficit because the current account is in disequilibrium. Its import expenditure outweighs its export revenue. This is because its currency, the pound, is overvalued. This makes the price of its exports relatively price uncompetitive. UK will not earn much from its exports. Another reason is the minimum wage laws in place. This causes firms' cost of production (COP) to increase. To continue earning normal or supernormal profits, they will hire less workers or fire employees. This causes a decrease in the national income. The remaining workers who are not retrenched need to work more at the same price. This may cause them to be overworked, leading to lower productivity. This may lead to an increase in COP. Another reason is because of the UK government's policies, which includes free healthcare. There is also a large amount of money spent on education, transport and defence. This leads to an increase in government spending. This contributes to the UK's high AD.
China has a current account surplus because it mantains an undervalued currency. Imports are now less cost competitve relative to domestic goods. Assuming Marshall lerner's condition holds, an undervalued currency encourages domestic consumers to purchase local goods and services. As M decreases, import expenditure decreases as well. In the context of China which has a huge domestic consumer base, CA surplus generated is very substantial. The Chinese government seeks mantain this surplus and buys foreign currency in the forex market to ensure RMB do not appreciate
Factors that causes current account disequilibrium are prices of goods at home and abroad, incomes of consumers at home and abroad, foreign exchange rates, consumers' preference for foreign and domestic goods and services and other factors like transportation costs or government policies.
Countries such as China has a sustained surplus on their current account as their undervalued yuan has led to the maintenance of cheap prices on products which encouraged exports to increase as external demand for their products increase. As foreign exchange rates with China remains the same, other countries will be willing to import from China relative to other countries with appreciation of currency which helps China to keep its exports strong. Citizens in China will find it expensive to import due to their undervalued local currency and as China has a large manufacturing market, these factors reduce the need for imports which then leads us to a current account surplus.
US suffers from a current account deficit as its consumers will import large quantities from other countries in addition to exports. In comparison to a huge labour force like China, US products will be more expensive. Competition will drive down export demand from US. US also provides a lot of international aid to other countries like African countries. All these factors may led to a current account deficit.
A country’s balance of payments would normally be in disequilibrium due to the current and/or capital accounts being in deficit or surplus respectively. This is unlike theoretical assumptions where it is possible for inflows to match outflows exactly at a certain exchange rate. Underlying factors that cause current account to be in surplus or deficit include inflation, incomes of locals and foreigners, foreign exchange rates as well as consumer preferences. In other words, any factor that contributes to aggregate demand affects current account.
In the case of Japan, they are probably able to enjoy sustained surplus of current account because of their strong domestic demand (preference) for their domestic products as well as low inflation rates (-1.30% as of 2010). High incomes per capita in Japan ($35,474.10 per person as of 2009) also contributes greatly to increase AD hence with higher purchasing power, it is likely that the Japanese are more willing to purchase goods and services produced by their country. Hence, despite possible deficit in current account due to strengthening of the Yen, their domestic market is able to counter and make up for the decrease in foreign demand for their more expensive domestic goods. In the long run, as the country is able to keep up with this surplus and the government does not need to buy back a lot of their own currency which leads to outflow from current account, the high exchange rate of the Yen can be sustained and foreign demand will continue to flow into the country as inflows for current account.
Another country for example, the UK is likely to have a sustained deficit of current account because of a much smaller pool of loyal domestic market which does not indulge in imported and foreign goods. With an income of $24,486.70 per person as of 2009, UK’s population is relatively well-off and able to enjoy a high standard of living. They are however, more likely to purchase foreign goods as they are of a relatively cheaper due to high inflation rates in UK (3.7% in April 2010).This will mean that AD in UK falls and a deficit results and in the long-run, the demand for the UK currency will fall. Weaker pound and rising fuel costs will continue to fuel inflation and drive prices higher. Similarly to the US, due to their high BOP deficit in the long run which is contributed by excess expenditure on non-capital goods, the deficit in CA can be sustained.
stitch: US has been in deficit since 1998 to 2010. This could be due to the over expenditure of the citizens who spent a lot on imports. Thus, causing the import expenditure to increase significantly. When this happens, the country's BOP will be in deficit. As it is the culture of the US to spend beyond their means, US suffered a continuous deficit in current account BOP. Moreover, US may be suffering from negative net factor income. This could be due to their foreign assets deteriorating greater than before and the local market may not be doing so well as to boost the deficit. As for China, she has been experiencing a current account surplus that increases by ten times since 1998 from 29.3 to 297.1. China's goods and services are relatively cheaper due to its undervalued yuan. Hence, the demand for the goods and services would be high, leading to the high exports revenue. This in turn boosts the current account since X-M would result in a greater value. Furthermore, due to the yuan being undervalued for long periods, China's goods and services remain highly demanded. Therefore, there is a sustained surplus on their current accounts.
Current account deficit arises when import expenditure exceeds export revenue and for current account surplus, it happens when import expenditure is lower than that of the export revenue.
China is likely to have a sustained surplus due to their undervalued currency which makes their exports relatively cheaper as compared to that of other countries like USA. Thus quantity demanded of exports will increase, increasing china's export revenue. since their currency is undervalued, it makes the price of their imports relatively more expensive than domestic produce, reducing the quantity demanded for imports when chinese substitute domestic products for imports and causing import expenditure to fall. (X-M)will increase, causing china to attain current account surplus.
As for US, due to the presence of an undervalued china currency, US currency will be overvalued which causes its exports to be more expensive than the chinese exports, thus losing its price competitiveness.Quantity demanded for US exports will fall, causing US export revenue to fall substantially. However in the US market, imports will be cheaper than US domestic products in US currency, thus causing US consumers to substitute imports (China X) for their domestic products, causing their import expenditure to exceed their export revue, incurring current account deficit.
US suffers from a current account deficit due to the high consumption of goods and services of Americans. Given that the demand for imported goods and services are price elastic, Americans will choose to purchase imports which are relatively cheaper than their domestic products. US products may be relatively price uncompetitive as they have higher costs of production as compared to other countries like China who has a large labour force. In addition, the high standards of living enjoyed by Americans means that they demand more imports since they have higher purchasing powers. Therefore, US has a sustained current account deficit as the value of her net exports (X-M) is low. On the other hand, China has a current account surplus as she maintains an undervalued currency. By doing so, her domestic products will become relatively cheaper as compared to foreign imports. Assuming that Marshall Lerner's condition holds, an undervalued currency encourages domestic consumers to purchase local goods and services. This is significant in keeping China’s imports low due to her high domestic market. Similarly, China exports will be more price competitive due to her undervalued currency, thus increasing her exports to foreign markets. Hence, China has a current account surplus as the value of her net exports (X-M) is high.
The position of the balance of payments current account in the country is largely affected by the export revenue and import expenditure of the country. A sustained deficit or surplus is therefore affected by the economic conditions in the country such as inflation or growth as well as the policies implemented by the country.
UK and US have suffered current account deficits from 1998 to 2010. One big reason is probably because these developed nations have relatively high average incomes than other countries and thus, have a greater demand for imports. On the other hand they also have very strong currencies and thus, their exports might not be price competetive. In addition, the rise of the Asian countries might have resulted in the loss of comparitive advantage in these Western nations and thus, their exports are not as high.
Japan has been able to enjoy a current account surplus in recent years and this may be due to its relatively tight control of imported goods.Inflation rates have also been so low such that it has resulted in deflation in some years causing exports to be much more price competetive and thus, export revenue will increase assuming the Marshall Lerrner condition. It also retains its comparitive advantage in goods such as automobiles and electronics.
CHina not only has a sustined surplus but a growing surplus thoroughout the years. Having cheap labour and an undervalued yuan have kept the prices of Chinese exports low and hence export revenue will increase. Even though it enjoys high rates of economic growth much of the rural population in CHina still have low incomes and hence, demand for imports will not have risen significantly. The thrifty nature of Asians would also keep demand for imports low and hence, China would retain its current account surplus
Countries like Japan and China have a sustained surplus in their current account.
It must be pointed out that with reference to the source, China is being seen to enjoy an increasing current account surplus. This can be explained by the fact that yuan, the Chinese currency, is undervalued, which makes the Chinese exports more price competitive and thus the increase in demand for these Chinese exports. This brings attention to the fact that the net value of the exports and imports of goods (X-M) is the visible balance in accounting for the current account. With the increase in demand for Chinese exports, it suggests that China's exports will increase, while its imports remain at all-time low due to the Asian thrift nature. Also due to the Asian thrift nature, the demand for local Chinese goods would hence be more feasible than the demand for foreign goods. This will lead to additional payments for physical goods coming into the country and thus a surplus in its current account.
On the other hand, countries like the United Kingdom and the United States have a sustained deficit in their current account.
This comes as a result of the residents low saving ratio and the high imports of goods and assets. In addition, the Dollar and the British Pound, currencies of the United States and the United Kingdom respectively, is very strong in the foreign exchange market. As a result, their exports are not price competitive which leads to a low demand for their exports. As imports (M) continues to increase while exports (X) decreases, the (X-M) factor will be negative which leads to a deficit in the current account. Lastly, due to the high investments abroad (Foreign Direct Investment)by both countries, it is recorded as an outflow in the invisible balance of the current account and hence further sustains the current account deficit.
Countries might use their BOP to influence their exchange rates. In the case of China, it has suppressed its current account balance to US$297.1 in 2009 from US$426.1 in 2008. A 30.3% fall in the current account balance. This could be due to the financial crisis that happened in late 2008, however,since then the economy has begun to pick up and China still kept its current account balance low. As we know, a current account deficit would lead to a depreciation of the currency, hence, China might want to do that to keep its currency undervalued. China has a large domestic economy. It also has a large amount of natural resources and human capital. It relies on its strong domestic economy for economic growth. It also has a low marginal propensity to import(MPM), due to large amount of resources. However, it does export of goods to other countries. Thus, a lower current account balance would result in a weaker currency. This would make their exports cheaper in international markets as compared to other foreign goods. This would increase their export revenue, resulting in economic growth. Such actions has seen retaliation from other countries mainly the US as they feel that China, undervaluing its currency are making US goods less price competitive, thus, lowering the US's export revenue. China is able to gain more export revenue and hence economic growth. This is a reason why countries might have a constantly low current account balance.
A country that has a current account surplus most of the time is Singapore. Singapore has a small and open economy. It relies heavily on trade for sustained economic growth as it has very little resources of its own. It has a high MPM and its imports mainly consist of foreign consumer goods or factors of production for manufacturing goods. Singapore's economy mainly consists of capital intensive industries such as electronics or pharmaceuticals. As it has a current account balance surplus, its export revenue is higher than its import expenditure. It has constantly attained a current account surplus, except during the 2008 financial crisis. Singapore will also want to leave it this way as this appreciates its currency. With a stronger currency, its imports which it is heavily dependent on will be cheaper, however, its exports will be more expensive. With cheaper imports, factors of production will be cheaper and cost of production will go down. Singaporean consumers are also able to enjoy cheaper consumer goods. However, its exports will be more expensive and less price competitive. This would lower Singapore's export revenue. Although this is a possible scenario, however, prices of Singapore's exports might also go down, provided the decrease in the cost of production is more than the rise in the price of exports due to a stronger Singapore dollar. Hence, this is also a reason why countries, especially trade dependent countries might want to keep their current account balance in surplus.
A current account surplus means that the inflow of currency exceeds the outflow. This inflow of funds could be due to the increased demand for that particular country’s exports. As X increases, the X revenue will also increase, thus leading to the inflow of funds into the country. Demand for China’s exports, for example, is high due to the undervalued Yuan. With an undervalued currency, the prices of domestic goods are lower, and their exports will be more price competitive in the foreign market. DD for the Chinese exports will thus increase, leading to the inflow of funds into China. This is reflected in the table given, whereby China’s current account balance has increased by more than 10 times (from US$29.3billion in 1998 to US$297.1billion in 2009). Hence, maintaining an undervalued Yuan has caused China to have a sustained surplus on their current account. Japan, on the other hand, is well-known for their quirky and high technology gadgets, as well as their high fashion clothes. As such, the demand for Japan’s exports are high, leading to the inflow of funds into Japan and in turn, allowing them to enjoy a sustained current account surplus. A current account deficit means that the outflow of currency exceeds the inflow. This outflow of funds may in turn be due to the increased spending on imports as incomes rises and preferences change. This is reflected in US and UK, which have been suffering from current account deficits since 1998. This may be due to the increased spending on imports from other countries as their income rises. Alternatively, as people become more well-travelled, they may develop a more exquisite taste. As such, they may demand for better quality goods or a larger variety of goods which cannot be found in their own home country. Hence, they spend an increasingly large amount of their income on foreign exports, causing an outflow of funds and in turn, leading to a current account deficit.
Current account is a component of BOP. It consists of Net factor services, balance of trade as well as transfer payment, such as those from richer countries to poorer countries, during international aid.
Current account surpluses may arise by either fixing a country's exchange rate or using a dirty float, such as china. This will result in china having a consistent surplus from their net exports (X-M) or Balance of trade. China's major trading partner, US has thus experienced a deficit in the same respect. Since 1989, the current account deficits of the United States have been increasingly larger, reaching close to 7% of the GDP in 2006. Political instability is another factor that can cause current account deficits. In politically unstable countries such as thailand, production is largely halted. This will cause a buildup in inventories and thus leading to firms cutting production and leading to unemployment. Since production is halted, exports will drop. More precisely, the demand for exports will drop, since other countries will not want to buy thailand goods. Since the firms have cut production, the local people have no choice but to import goods for the little production that exists. Therefore, Exports will fall and iMports will increase. Therefore the value of X-M will decrease or become more negative. Hence, for as long as there is political instability, the country has the possibility of running a current account deficit for a long long long time...
China is able to have a sustained surplus as it has been keeping an undervalued currency, making its exports cheaper and imports more expensive. Since China has a big domestic market, a cheaper currency will encourage domestic consumption of goods produced in China. Furthermore, other countries may choose to import goods from China since it is much more cheaper. This will cuase an increase in China's exports, leading to an overall increase in X-M, an overall increase in exports revenue and there is an increase in AD for China's goods, leading to a rise in China's GDP. From the table provided, it can be seen that China did have a sustained surplus from 1998 to 2009, with the exception in 1999 and 2009, where the surplus is less than the previous years. The fall in surplus in 2009 can be attributed to the sub prime crisis which started in the United States of America.
A global recession will decrease the purchasing power of the people worldwide and thus demand for China's exports may fall, leading to a drop in their GDP.
The Americans tend to have a high import expenditure since there are other countries such as China which are able to sell goods at lower costs. Overall X-M decreases, and there is a fall in USA's GDP, thus they have a deficit.
Since USA is a major trading partner of China, the inability of USA to purchase goods from China will lead to a multiplier effect in China as well, causing China's account surplus to be lesser.
With the recent commotion over China being a currency manipulator, there is a possibility that China's surplus may also drop further beyond 2009 should USA decides to retaliate against China.
China always has a current account surplus as she refuses to revalue her exchange rate and keeps it undervalued, hence creating conflicts with the US. By keeping the currency undervalued, it will cause foreign imports to be more expensive relative to domestic goods (assume Marshall lerner's condition holds) Hence, it encourages domestic consumers to purchase domestically produces goods and demand for foreign imports drop, causing M to decrease. This is especially significant for China who has a huge domestic consumer market. With a lower currency, exports (X) will rise (assuming Marshall Lerner's condition holds). This is because China's export markets will import more of China's cheaper exports. Hence China's overall (X-M) increases and current account improves (Surplus).
ReplyDeleteOn the contrary, the USA has been having a current account deficit from 1998 to 2010. This is because the US domestic markets spendddddddd alot, hence resulting in large imports (M). Furthermor, The growth of China's current account surplus has been a key counterpart to the widening US deficit as were surpluses of other Asian countries from 2001 to 2005 and surpluses of oil-exporting countries (including Russia), especially from 2005 through mid-2008. It could also be due to US large fiscal deficit,(10 percent of GDP instead of adjusting to 2 percent) because of uncontrolled spending on health care and Social Security. Hence this lead to a large M causing (X-M) to go into a deficit
Asians are generally thrifty and Americans, generous. China's cheap Yuan will lead to US consumers finding Chinese goods relatively cheaper, thus the qty dd for M increases. US firms find imported raw materials from China cheaper with this undervaluation and switch to buy from China to lower cost of production. Hence, China's X revenue increases further. On the other hand, US exports will be relatively more exp for the CHinese and hence there will be a drop in China's qty dd for US X. US X expenditure will decrease and China's M also decreases. (X-M) for China improves. Trade surplus would have caused the Yuan to appreciate but due to China's control of the exchange rate, it has created an artificial comparative advantage hence the increase in its current acct balance from 29.3 billion in 1998 to 297.1 billion in 2009. While there is a decreasing trend for US's current acct balance.
ReplyDeleteUK has a sustained deficit because the current account is in disequilibrium. Its import expenditure outweighs its export revenue. This is because its currency, the pound, is overvalued. This makes the price of its exports relatively price uncompetitive. UK will not earn much from its exports. Another reason is the minimum wage laws in place. This causes firms' cost of production (COP) to increase. To continue earning normal or supernormal profits, they will hire less workers or fire employees. This causes a decrease in the national income. The remaining workers who are not retrenched need to work more at the same price. This may cause them to be overworked, leading to lower productivity. This may lead to an increase in COP. Another reason is because of the UK government's policies, which includes free healthcare. There is also a large amount of money spent on education, transport and defence. This leads to an increase in government spending. This contributes to the UK's high AD.
ReplyDeleteChina has a current account surplus because it mantains an undervalued currency. Imports are now less cost competitve relative to domestic goods. Assuming Marshall lerner's condition holds, an undervalued currency encourages domestic consumers to purchase local goods and services. As M decreases, import expenditure decreases as well. In the context of China which has a huge domestic consumer base, CA surplus generated is very substantial. The Chinese government seeks mantain this surplus and buys foreign currency in the forex market to ensure RMB do not appreciate
ReplyDeleteFactors that causes current account disequilibrium are prices of goods at home and abroad, incomes of consumers at home and abroad, foreign exchange rates, consumers' preference for foreign and domestic goods and services and other factors like transportation costs or government policies.
ReplyDeleteCountries such as China has a sustained surplus on their current account as their undervalued yuan has led to the maintenance of cheap prices on products which encouraged exports to increase as external demand for their products increase. As foreign exchange rates with China remains the same, other countries will be willing to import from China relative to other countries with appreciation of currency which helps China to keep its exports strong. Citizens in China will find it expensive to import due to their undervalued local currency and as China has a large manufacturing market, these factors reduce the need for imports which then leads us to a current account surplus.
US suffers from a current account deficit as its consumers will import large quantities from other countries in addition to exports. In comparison to a huge labour force like China, US products will be more expensive. Competition will drive down export demand from US. US also provides a lot of international aid to other countries like African countries. All these factors may led to a current account deficit.
A country’s balance of payments would normally be in disequilibrium due to the current and/or capital accounts being in deficit or surplus respectively. This is unlike theoretical assumptions where it is possible for inflows to match outflows exactly at a certain exchange rate. Underlying factors that cause current account to be in surplus or deficit include inflation, incomes of locals and foreigners, foreign exchange rates as well as consumer preferences. In other words, any factor that contributes to aggregate demand affects current account.
ReplyDeleteIn the case of Japan, they are probably able to enjoy sustained surplus of current account because of their strong domestic demand (preference) for their domestic products as well as low inflation rates (-1.30% as of 2010). High incomes per capita in Japan ($35,474.10 per person as of 2009) also contributes greatly to increase AD hence with higher purchasing power, it is likely that the Japanese are more willing to purchase goods and services produced by their country. Hence, despite possible deficit in current account due to strengthening of the Yen, their domestic market is able to counter and make up for the decrease in foreign demand for their more expensive domestic goods. In the long run, as the country is able to keep up with this surplus and the government does not need to buy back a lot of their own currency which leads to outflow from current account, the high exchange rate of the Yen can be sustained and foreign demand will continue to flow into the country as inflows for current account.
Another country for example, the UK is likely to have a sustained deficit of current account because of a much smaller pool of loyal domestic market which does not indulge in imported and foreign goods. With an income of $24,486.70 per person as of 2009, UK’s population is relatively well-off and able to enjoy a high standard of living. They are however, more likely to purchase foreign goods as they are of a relatively cheaper due to high inflation rates in UK (3.7% in April 2010).This will mean that AD in UK falls and a deficit results and in the long-run, the demand for the UK currency will fall. Weaker pound and rising fuel costs will continue to fuel inflation and drive prices higher. Similarly to the US, due to their high BOP deficit in the long run which is contributed by excess expenditure on non-capital goods, the deficit in CA can be sustained.
stitch:
ReplyDeleteUS has been in deficit since 1998 to 2010. This could be due to the over expenditure of the citizens who spent a lot on imports. Thus, causing the import expenditure to increase significantly. When this happens, the country's BOP will be in deficit. As it is the culture of the US to spend beyond their means, US suffered a continuous deficit in current account BOP. Moreover, US may be suffering from negative net factor income. This could be due to their foreign assets deteriorating greater than before and the local market may not be doing so well as to boost the deficit.
As for China, she has been experiencing a current account surplus that increases by ten times since 1998 from 29.3 to 297.1. China's goods and services are relatively cheaper due to its undervalued yuan. Hence, the demand for the goods and services would be high, leading to the high exports revenue. This in turn boosts the current account since X-M would result in a greater value. Furthermore, due to the yuan being undervalued for long periods, China's goods and services remain highly demanded. Therefore, there is a sustained surplus on their current accounts.
Current account deficit arises when import expenditure exceeds export revenue and for current account surplus, it happens when import expenditure is lower than that of the export revenue.
ReplyDeleteChina is likely to have a sustained surplus due to their undervalued currency which makes their exports relatively cheaper as compared to that of other countries like USA. Thus quantity demanded of exports will increase, increasing china's export revenue. since their currency is undervalued, it makes the price of their imports relatively more expensive than domestic produce, reducing the quantity demanded for imports when chinese substitute domestic products for imports and causing import expenditure to fall. (X-M)will increase, causing china to attain current account surplus.
As for US, due to the presence of an undervalued china currency, US currency will be overvalued which causes its exports to be more expensive than the chinese exports, thus losing its price competitiveness.Quantity demanded for US exports will fall, causing US export revenue to fall substantially. However in the US market, imports will be cheaper than US domestic products in US currency, thus causing US consumers to substitute imports (China X) for their domestic products, causing their import expenditure to exceed their export revue, incurring current account deficit.
US suffers from a current account deficit due to the high consumption of goods and services of Americans. Given that the demand for imported goods and services are price elastic, Americans will choose to purchase imports which are relatively cheaper than their domestic products. US products may be relatively price uncompetitive as they have higher costs of production as compared to other countries like China who has a large labour force. In addition, the high standards of living enjoyed by Americans means that they demand more imports since they have higher purchasing powers. Therefore, US has a sustained current account deficit as the value of her net exports (X-M) is low.
ReplyDeleteOn the other hand, China has a current account surplus as she maintains an undervalued currency. By doing so, her domestic products will become relatively cheaper as compared to foreign imports. Assuming that Marshall Lerner's condition holds, an undervalued currency encourages domestic consumers to purchase local goods and services. This is significant in keeping China’s imports low due to her high domestic market. Similarly, China exports will be more price competitive due to her undervalued currency, thus increasing her exports to foreign markets. Hence, China has a current account surplus as the value of her net exports (X-M) is high.
The position of the balance of payments current account in the country is largely affected by the export revenue and import expenditure of the country. A sustained deficit or surplus is therefore affected by the economic conditions in the country such as inflation or growth as well as the policies implemented by the country.
ReplyDeleteUK and US have suffered current account deficits from 1998 to 2010. One big reason is probably because these developed nations have relatively high average incomes than other countries and thus, have a greater demand for imports. On the other hand they also have very strong currencies and thus, their exports might not be price competetive. In addition, the rise of the Asian countries might have resulted in the loss of comparitive advantage in these Western nations and thus, their exports are not as high.
Japan has been able to enjoy a current account surplus in recent years and this may be due to its relatively tight control of imported goods.Inflation rates have also been so low such that it has resulted in deflation in some years causing exports to be much more price competetive and thus, export revenue will increase assuming the Marshall Lerrner condition. It also retains its comparitive advantage in goods such as automobiles and electronics.
CHina not only has a sustined surplus but a growing surplus thoroughout the years. Having cheap labour and an undervalued yuan have kept the prices of Chinese exports low and hence export revenue will increase. Even though it enjoys high rates of economic growth much of the rural population in CHina still have low incomes and hence, demand for imports will not have risen significantly. The thrifty nature of Asians would also keep demand for imports low and hence, China would retain its current account surplus
Countries like Japan and China have a sustained surplus in their current account.
ReplyDeleteIt must be pointed out that with reference to the source, China is being seen to enjoy an increasing current account surplus. This can be explained by the fact that yuan, the Chinese currency, is undervalued, which makes the Chinese exports more price competitive and thus the increase in demand for these Chinese exports. This brings attention to the fact that the net value of the exports and imports of goods (X-M) is the visible balance in accounting for the current account. With the increase in demand for Chinese exports, it suggests that China's exports will increase, while its imports remain at all-time low due to the Asian thrift nature. Also due to the Asian thrift nature, the demand for local Chinese goods would hence be more feasible than the demand for foreign goods. This will lead to additional payments for physical goods coming into the country and thus a surplus in its current account.
On the other hand, countries like the United Kingdom and the United States have a sustained deficit in their current account.
This comes as a result of the residents low saving ratio and the high imports of goods and assets. In addition, the Dollar and the British Pound, currencies of the United States and the United Kingdom respectively, is very strong in the foreign exchange market. As a result, their exports are not price competitive which leads to a low demand for their exports. As imports (M) continues to increase while exports (X) decreases, the (X-M) factor will be negative which leads to a deficit in the current account. Lastly, due to the high investments abroad (Foreign Direct Investment)by both countries, it is recorded as an outflow in the invisible balance of the current account and hence further sustains the current account deficit.
Countries might use their BOP to influence their exchange rates. In the case of China, it has suppressed its current account balance to US$297.1 in 2009 from US$426.1 in 2008. A 30.3% fall in the current account balance. This could be due to the financial crisis that happened in late 2008, however,since then the economy has begun to pick up and China still kept its current account balance low. As we know, a current account deficit would lead to a depreciation of the currency, hence, China might want to do that to keep its currency undervalued. China has a large domestic economy. It also has a large amount of natural resources and human capital. It relies on its strong domestic economy for economic growth. It also has a low marginal propensity to import(MPM), due to large amount of resources. However, it does export of goods to other countries. Thus, a lower current account balance would result in a weaker currency. This would make their exports cheaper in international markets as compared to other foreign goods. This would increase their export revenue, resulting in economic growth. Such actions has seen retaliation from other countries mainly the US as they feel that China, undervaluing its currency are making US goods less price competitive, thus, lowering the US's export revenue. China is able to gain more export revenue and hence economic growth. This is a reason why countries might have a constantly low current account balance.
ReplyDeleteA country that has a current account surplus most of the time is Singapore. Singapore has a small and open economy. It relies heavily on trade for sustained economic growth as it has very little resources of its own. It has a high MPM and its imports mainly consist of foreign consumer goods or factors of production for manufacturing goods. Singapore's economy mainly consists of capital intensive industries such as electronics or pharmaceuticals. As it has a current account balance surplus, its export revenue is higher than its import expenditure. It has constantly attained a current account surplus, except during the 2008 financial crisis. Singapore will also want to leave it this way as this appreciates its currency. With a stronger currency, its imports which it is heavily dependent on will be cheaper, however, its exports will be more expensive. With cheaper imports, factors of production will be cheaper and cost of production will go down. Singaporean consumers are also able to enjoy cheaper consumer goods. However, its exports will be more expensive and less price competitive. This would lower Singapore's export revenue. Although this is a possible scenario, however, prices of Singapore's exports might also go down, provided the decrease in the cost of production is more than the rise in the price of exports due to a stronger Singapore dollar. Hence, this is also a reason why countries, especially trade dependent countries might want to keep their current account balance in surplus.
A current account surplus means that the inflow of currency exceeds the outflow. This inflow of funds could be due to the increased demand for that particular country’s exports. As X increases, the X revenue will also increase, thus leading to the inflow of funds into the country.
ReplyDeleteDemand for China’s exports, for example, is high due to the undervalued Yuan. With an undervalued currency, the prices of domestic goods are lower, and their exports will be more price competitive in the foreign market. DD for the Chinese exports will thus increase, leading to the inflow of funds into China. This is reflected in the table given, whereby China’s current account balance has increased by more than 10 times (from US$29.3billion in 1998 to US$297.1billion in 2009). Hence, maintaining an undervalued Yuan has caused China to have a sustained surplus on their current account.
Japan, on the other hand, is well-known for their quirky and high technology gadgets, as well as their high fashion clothes. As such, the demand for Japan’s exports are high, leading to the inflow of funds into Japan and in turn, allowing them to enjoy a sustained current account surplus.
A current account deficit means that the outflow of currency exceeds the inflow. This outflow of funds may in turn be due to the increased spending on imports as incomes rises and preferences change. This is reflected in US and UK, which have been suffering from current account deficits since 1998. This may be due to the increased spending on imports from other countries as their income rises. Alternatively, as people become more well-travelled, they may develop a more exquisite taste. As such, they may demand for better quality goods or a larger variety of goods which cannot be found in their own home country. Hence, they spend an increasingly large amount of their income on foreign exports, causing an outflow of funds and in turn, leading to a current account deficit.
Current account is a component of BOP. It consists of Net factor services, balance of trade as well as transfer payment, such as those from richer countries to poorer countries, during international aid.
ReplyDeleteCurrent account surpluses may arise by either fixing a country's exchange rate or using a dirty float, such as china. This will result in china having a consistent surplus from their net exports (X-M) or Balance of trade. China's major trading partner, US has thus experienced a deficit in the same respect. Since 1989, the current account deficits of the United States have been increasingly larger, reaching close to 7% of the GDP in 2006.
Political instability is another factor that can cause current account deficits. In politically unstable countries such as thailand, production is largely halted. This will cause a buildup in inventories and thus leading to firms cutting production and leading to unemployment. Since production is halted, exports will drop. More precisely, the demand for exports will drop, since other countries will not want to buy thailand goods. Since the firms have cut production, the local people have no choice but to import goods for the little production that exists. Therefore, Exports will fall and iMports will increase. Therefore the value of X-M will decrease or become more negative. Hence, for as long as there is political instability, the country has the possibility of running a current account deficit for a long long long time...
China is able to have a sustained surplus as it has been keeping an undervalued currency, making its exports cheaper and imports more expensive. Since China has a big domestic market, a cheaper currency will encourage domestic consumption of goods produced in China. Furthermore, other countries may choose to import goods from China since it is much more cheaper. This will cuase an increase in China's exports, leading to an overall increase in X-M, an overall increase in exports revenue and there is an increase in AD for China's goods, leading to a rise in China's GDP. From the table provided, it can be seen that China did have a sustained surplus from 1998 to 2009, with the exception in 1999 and 2009, where the surplus is less than the previous years. The fall in surplus in 2009 can be attributed to the sub prime crisis which started in the United States of America.
ReplyDeleteA global recession will decrease the purchasing power of the people worldwide and thus demand for China's exports may fall, leading to a drop in their GDP.
The Americans tend to have a high import expenditure since there are other countries such as China which are able to sell goods at lower costs. Overall X-M decreases, and there is a fall in USA's GDP, thus they have a deficit.
Since USA is a major trading partner of China, the inability of USA to purchase goods from China will lead to a multiplier effect in China as well, causing China's account surplus to be lesser.
With the recent commotion over China being a currency manipulator, there is a possibility that China's surplus may also drop further beyond 2009 should USA decides to retaliate against China.