Extract 2 - Globalisation and Balance of Payments Inbalances

Text and commentary

• imbalances refer to persistant current account surpluses for some countries constrasted with large currenct accounr deficits in other nations
• main way of measuring the scale as trade / current account imbalances is as a % of gdp
• usa runs a permanent (structural) current account deficity on bop
• countries running external deficits normally see their currency depreciate
• size uk external deficit halved from 2007 to 2009 due to recession
• since has been stable at $400b a year
• real GDP growth in uk economy post crisis has brought about a fall in the external deficit as a % of uk gdp

From diagram 2.1 we can see

• chine is running a structural surplus 
• this surplus is falling 
• usa has structural trade deficit
• this deficit is declining 
• both economies have huge trade imbalances

as a % of GDP

• chinas current account surplus has diminished since peaking at 10% of gdp in 2007
• chinese surplu aved around 2% 2012-2014
• most likely because china has been growing at 9% each year 
• 2004 usa were running current account deficit of around 5% of gdp
• improved sharply in 2009 and since is running around 2% of gdp
• still big trade imbalances

from diagram 2.2 we see

• the dollar has fallen sa a currency 
• extent of changes isnt great
• depreciation between 2009 - 2011 of 8.65% but deficit got worse at this time
• this suggests J curve effect 

chinese yuan exchange rate against 1$

• china ends fully fixed exchange rate against us dollar 2005 then yuan appreciatesuntil 2008 where an effetive return of a fixed exchange rate is put in place during global financial crisis causing value to remain same till 2010
• china devalues yuan in the summer of 2015 
• trade imbalances between china and us - if everyone had fully floating exchange rates it seems likely ceteris paribus chinese currency would appreicte to a greater extent 

Analyse and evaluate why a change in a nations currency doesnt always bring abour a significant substantial change in trade balances

• trade balance - X-M

how changes in exchange rates affects the trade balance (each bullet point acts as a connective)

• depreciation in the external value of the us $
• $ has fallen in value e.g v chinese yuan and japanese yen
• us goods and services now cheaper in forgein currency terms
• imports into the usa are more expensive prices in us $
• overseas demadn for us exports should rise
• demand for imports coming into us should fall
• ceteris paribus, the value of us exports will rise (depends on PED and PES)
• ceteris paribus, the value of us imports will fall
• so the us trade deficit should reduce in size 

Evaluating the effects of a currency depreciation

In theory a depreciation of the exchange rate causes an expansion of AD and economic growth, but this depends on

• the length og time lags as consumers and businesses respond to a change in the price of exports and imports 
• the scale of any change in the exchange rate (figure 2.2…