Balance of Payments Problems and The Invisible Balance
Problems with a country's balance of trade (or balance of payments) are often associated with an inappropriate valuation of its currency – that is, its country's foreign exchange rate.
If a country's exchange rate is too high, its exports will become uncompetitive as buyers in foreign countries require more of their own currency to pay for them. In the meantime, it also becomes cheaper for the citizens of the country to buy goods from overseas (as opposed to buying locally produced goods) – because an over-valued currency makes foreign products less expensive.
The simultaneous decline in currency inflows (due to decreased exports) and the rise in outflows (due to increased imports) sends the Balance of Trade into deficit which then needs to be paid for by a transfer of funds in some form – either invisible transfers (aid, etc.) or capital flows (loans, etc.). However, relying on funds like this, to support a trade deficit, is unsustainable, and the country may eventually be placed in a position where its currency needs to be devalued.
If, on the other hand, a currency is under-valued, its exports will become cheaper and therefore more competitive internationally. At the same time, imports will also become more costly – stimulating the production of domestic substitutes to replace them. This will result in a growth of currency flowing into the country and a decline in currency flowing out of it – resulting in an improvement in the country's balance of trade.
Because a nation's exchange rate has a big impact on its 'balance of trade' and its 'balance of payments' many economists favour freely floating exchange rates over the older, fixed (or pegged) rates of foreign currency exchange. Floating exchange rates allow more regular adjustments in exchange rates to occur, allowing the greater opportunity for international payments to maintain equilibrium.
Read more about this topic: Invisible Balance
Famous quotes containing the words balance of, balance, problems and/or invisible:
“It has been the struggle between privileged men who have managed to get hold of the levers of power and the people in general with their vague and changing aspirations for equality, for justice, for some kind of gentler brotherhood and peace, which has kept that balance of forces we call our system of government in equilibrium.”
—John Dos Passos (1896–1970)
“You need an infinite stretch of time ahead of you to start to think, infinite energy to make the smallest decision. The world is getting denser. The immense number of useless projects is bewildering. Too many things have to be put in to balance up an uncertain scale. You can’t disappear anymore. You die in a state of total indecision.”
—Jean Baudrillard (b. 1929)
“There are nowadays professors of philosophy, but not philosophers. Yet it is admirable to profess because it was once admirable to live. To be a philosopher is not merely to have subtle thoughts, nor even to found a school, but so to love wisdom as to live according to its dictates, a life of simplicity, independence, magnanimity, and trust. It is to solve some of the problems of life, not only theoretically, but practically.”
—Henry David Thoreau (1817–1862)
“Good poetry could not have been otherwise written than it is. The first time you hear it, it sounds rather as if copied out of some invisible tablet in the Eternal mind than as if arbitrarily composed by the poet.”
—Ralph Waldo Emerson (1803–1882)