What is the balance of payments? What is the balance of trade and describe the r

Question

What is the balance of payments? What is the balance of trade and describe the relationship between the trade balance and capital flows among two countries? What are the three markets that international finance is the focus of and why? Please describe the relationship between output and spending, savings and investment, the trade balance, and the flow of capital investment from one country to another. You can use the macro model of an open economy in class or describe in words. Please apply the discussion to the Chinese trade surplus with the US. What is the root cause of the surplus / deficit between China and the US and what does this mean for Chinese investment in the US? How does a weak yuan exacerbate the disbalance?

Explanation / Answer

The balance of payments is the systematic record of all the transections between residents and non residents of a country for a specific period of time. It is maintained by central bank of every country, federal reserve in US, as per the guidelines of IMF. BOP describes the total value of goods and services exported and imported by a country, if a country has positive BOP, it means that total value of exports are more than that of imports, similarly when there is negative BOP it shows that total value of imports are more than that of exports. Now this BOP are categorized in three main categories/ markets :- 1. Current account, this contains all the visible and invisible goods and services. 2. Capital account, it contains the FDI/FPI, sovereign loans, NRI debt and commercial loans, 3. Financial account, it contains foreign reserves, gold and SDR held with IMF.

When one country imports certain goods then the equivalent value is mentioned under the debit entry of the BOP, similarly when the country export any goods and services the equivalent value is mentioned in the credit entry of the BOP. Negative BOP desribes that we are spending more money, and positive BOP describes the surplus or savings.

Now in the US bilateral trade with china, we import more goods and services from china as compared to our exports, that is because the chinese products and services are more competitive in the market or we can say that they are cheaper than that of US because of high population, the factor cost is less. When we have two equivalent choices of products in the market, which one do we usually buy, obviously the cheaper one, thus the US has a large market for chinese products and investments as well, weak yuan leads to cheap chinese exports, again making them competitive enough.

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