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The Balance of Payments, Accounts on the Balance of Payments - Coggle…
The Balance of Payments
current account deficit
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causes
poor price competition, higher inflation than trading partners, low levels of capital investment
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current account surplus
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causes
surplus of savings over investment for firms, governments and households
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The J Curve Effect
in the short run, depreciation of the exchange rate may not improve the current account of the Balance of Payments
the price elasticities of demand for exports and imports are likely to be less elastic than they are in the long term
initially the quantity of imports will remain steady because contracts for imported goods are signed. Inelastic response to the change in exchange rate
earnings from selling more exports will be insufficient to compensate for higher total spending on imports
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providing the price elasticity of demand for M and X are greater than one, the trade balance will improve overtime
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