Define balance of payments. What is the difference between a positive balance of payments and a negative balance of payments? Explain why a negative balance of payments is considered detrimental to a country’s economy.

Question

What will be an ideal response?

Answer 1

The balance of payments is the net cost of imports and the income from exports that a country maintains. If a country spends more money abroad than it receives from abroad, it has a negative balance of payments. If a country spends less money abroad than it receives from abroad, it has a positive balance of payments. The final figure for the balance of payments is composed of the balance of trade and the balance on invisibles. A negative balance of payments is considered detrimental to a country’s economy for a number of reasons. It indicates that the country’s products are not competitive with those of other countries. The reason may be the prices or quality to that a country cannot produce a particular commodity. Another concern is that a negative balance of payments tends to reduce the value of the country’s currency in relation to those of other nations. If a country continues to trade its money for commodities abroad, the laws of supply and demand dictate that the value of the country’s currency eventually will decline and more money goes abroad than is returned. Lastly, a negative balance of payments may indicate that a country is too dependent on the products of other nations which introduces the potential for international blackmail. When a great deal of a country’s currency is held abroad the value of that currency is especially vulnerable to the actions of other governments and individuals.