Balance of Payments Surplus & Deficits.

Does a BoP Deficit cause problems? It depends on the size and nature of the deficit! The larger the deficit, over a longer period of time the greater the problems will be! If it’s cheap imports & an increase in M??? If it’s the UK not being competitive and there is a fall in X???

Short run V long run deficit! In the Short run…. A deficit might mean that UK households have a better standard of living… In the Long run… A deficit might cause UK businesses to suffer, rising unemployment …. and falling standards of living!

All have issues with use! Curing BoP deficit… Deflation Direct controls Devaluation The 3 D’s All have issues with use!

Can a surplus BoP cause problems? A surplus suggests lots of economic success Exporting more than Importing! Again it depends on the size of the surplus! And if one country is more successful than others… then this can cause other countries to act to reduce their deficit … and use direct controls! Surplus can cause inflation… as an increase in X = an injection = outward shift in AD!

All have issues with use! Curing BoP surplus… Reflation Remove import controls Revaluation The 3 R’s All have issues with use!