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2. The balance of international payments is a book-keeping tautology which is essentially irrelevant to a market economy. Discuss - Essay Example

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In a market economy there exists no government influence and equilibrium in the deficit and surplus in the balance of payments is achieved without government control. Disequilibrium or equilibrium in the balance of payments (BOP) refers to the balance of the account entries…
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2. The balance of international payments is a book-keeping tautology which is essentially irrelevant to a market economy. Discuss
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Extract of sample "2. The balance of international payments is a book-keeping tautology which is essentially irrelevant to a market economy. Discuss"

Balance of international payments al Affiliation) The balance of payments irrelevance to a market economy In a market economy there exists no government influence and equilibrium in the deficit and surplus in the balance of payments is achieved without government control. Disequilibrium or equilibrium in the balance of payments (BOP) refers to the balance of the account entries. Accommodating items for instance, use of special drawing rights, borrowing from the IMF and drawing from the reserves held by the Central Bank of foreign currencies are not included (McConnell & Brue, 2013). Excluding these accommodating items yields neither surplus nor deficit in the overall balance of international payments hence causing equilibrium. Conversely, a more vital concept of the balance of payments equilibrium is the basic balance, which is based on the presence of autonomous items in BOP. The autonomous items include items that cannot be influenced easily by the Government and are determined by certain long-term factors. Basic balance regards autonomous, the long-term capital shifts both on Government or private account held in the capital account and excludes items in the current account balance of payments.
Conversely, in the capital account short-term movements such as the use of special drawing rights, borrowing from Central Banks or IMF, change in foreign exchange reserves are of accommodating the nature and transitory. Therefore, they are excluded from equilibrium and the concept of basic balance (McConnell & Brue, 2013). An alternative to these accommodating items (compensatory items) has to be made to ensure equality of foreign exchange receipts and payments. A change in the compensatory elements is essential to offset the surplus or deficit in the autonomous items. Autonomous movements cancel out over some suitable period and therefore there lacks the need for compensatory changes and in such a case the balance of payments is said to be in equilibrium (McConnell & Brue, 2013).
References
McConnell, C., & Brue, S. (2013). Macroeconomics: Brief edition (2nd ed.). New York: McGraw-Hill/Irwin. Read More
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