Question

Describe the balance of payments of how international transactions are calculated. What are the problems with focusing too much in the magnitude of trade deficits in goods and services? What additional economic measures should be taken into consideration to diagnose any economic problems?

Answer 1

Balance of payments is the record of all the transactions of the funds or money going in and out of the country. Generally international transactions are recorded by the government agencies in the countries in the form of credit and debit. When an international transaction is in the form of inflow of funds, it is recorded as credit, and when the transaction is in the form of outflow of funds, it is recorded as debit.

The problems with focusing too much in the magnitude of trade deficits in goods and services may lead to countries with higher imports or trade deficits adopting anti-trade measures, such as tariffs, and other trade barriers to reduce their imports and those countries with surplus in current account balance to continuing to increase their exports, which may lead to trade war between these countries, thereby bringing down the international trade.

The additional economic measures such as economic growth, poverty rate, debt-to-GDP ratio etc. should be taken into consideration to diagnose other economic problems in these countries.