Balance of payments question (1 Viewer)

[nickyroony]

I STILL don't get why the balance of payments have to equal to zero. On holiday before my teacher could fully explain it, so I read and re-read the textbook (Leading Edge) and still don't really get why. It gives you equations (pg 97) on how it's equal, but doesn't really say WHY. Anyone care to explain? ^^;;

 

[mattlaidely]

haha yeh we finished at the same part and i was wondering the same thing.. give me a day to relax and then ill try work it out

 

[mattlaidely]

ok so i looked through the leading edge text book and you were right, it doesnt say why.. just that it does.. :S

 

[insert-username]

I'm pretty sure that when the balance of payments equals 0, credit (money coming in) and debit (money going out) equal each other, and there is equilibrium. However, countries almost never run in equilibrium: they run a trade surplus or deficit in the current account, and depending on the surplus or deficit in the capital and financial accounts the balance is not equal to 0. Theoretically, the balance of payments should equal 0, but I'm not sure if it actually does. I'll crack out the textbook as well (I'm using Leading Edge too).


I_F

 

[Rafy]

I'm pretty sure that when the balance of payments equals 0, credit (money coming in) and debit (money going out) equal each other, and there is equilibrium. However, countries almost never run in equilibrium: they run a trade surplus or deficit in the current account, and depending on the surplus or deficit in the capital and financial accounts the balance is not equal to 0. Theoretically, the balance of payments should equal 0, but I'm not sure if it actually does. I'll crack out the textbook as well (I'm using Leading Edge too).


I_F

It will equal 0 under a flexible exchange rate determination system as this allows an EQUILIBRIUM to be achieved. And how is E.R determined? By the demand and supply of AUD, which corresponds to credit and debits in the balance of payments. (i.e credits on the bop will usually result in demand for AUD).

So it equals 0 as the flows of money in the BOP cause the demand and supply of AUD, (which is in equlibrium in a flexible system; demand=supply)

equiibrium meaning everything is equal, so the balance is 0.

Of course economics is a very theoretical subject, and reality may differ slightly.