Global Economy and International Financing

Write 8 pages with APA style on Global Economy and International Financing. As the consequences are the results of relative actions/measures, it makes sense to review the measures of reducing the BOP deficit and consider the impact of each measure on economics. Definition of balance of payments and balance of payments deficit Pippenger (1973, p.6) defines balance of payments as a record of the value of all transactions between foreign and domestic residents over a certain period of time, usually one year. the balance of payments is based on the principle of double entry bookkeeping where the dollar value of every transaction is recorded as both a debit and a credit (Pippenger, 1973). Debit or minus entry in the balance of payments reflects the purchase or import of anything from a foreign partner, while credit or plus item in the balance of payments reflects the sale or export of anything to a foreign partner (Pippenger, 1973). Applying double-entry bookkeeping, the payments received for exports are recorded as debit and the payments made on imports are recorded as a credit (Pippenger, 1973). Balance of payments deficit is an imbalance in a nation’s balance of payments in which payments received by the country are less than the payments made by the country (Economic Glossary, n.d.). This term is also known as the unfavorable balance of payments because less currency is flowing into the country than is flowing out (Economic Glossary, n.d.). Thus, the balance of payments deficit causes unequal flow of currency and results in reducing the supply of money in the nation, imposing negative implications for unemployment, inflation, production, and other aspects of the import-prevailing economy (Economic Glossary, n.d.). In order to minimize these implications, it is necessary to understand better how the balance of payments deficit can be reduced and what are the consequences of possible measures of reducing BOP? Measures of reducing BOP deficit and its consequences There exist different measures aimed at reducing the balance of payments deficits. these measures are divided into two groups: automatic correction and deliberate correction of BOP disequilibrium. In this paper, we will review only deliberate measures as tools for reducing the deficit in a BOP. Deliberate measures, broadly applied in different economies of the world, are differentiated by three main categories, including monetary measures, trade measures, and miscellaneous measures. Monetary measures – monetary contraction or money supply allows a country to influence its level of aggregate domestic demand, demand for exports and imports, and price level of domestic production (Cherunilam, 2008). Contraction of money supply results is applied in order to reduce the purchasing power and consequently, aggregate demand of nation (Cherunilam, 2008). By adopting monetary contraction in the country, domestic output decreases, while domestic real interest increases. Increase in the rate of interest is caused by the result of a decrease in money supply (Dwivedi, 2010). Increase in interest rate leads to a reduction of domestic investment, and the fall of investment leads to a reduction of income levels of the population (Dwivedi, 2010). Additionally, an increase in the interest rate leads to the inflow of foreign capital, which reduces deficits in the capital account of BOP (Dwivedi, 2010). In result, demand for imports is reduced because of the fall in domestic prices and domestic aggregate demand, while demand for export increases (Cherunilam, 2008).

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