Question

Propose the similarities and differences of the current account and financial account in the balance of payments structure. In doing so, apply your analysis to explain the trade balance between the U.S. and China.

Answer 1

The current account records the details about the export and import of the country with other countries. It maintains a record of the transactions and the amount of money that is traded for i.e the amount of money that is received in exports and the amount that is paid in imports. The financial account deals with the financial assets and liabilities of the non-residents. The similarity is that both the accounts deal with balance of payments.

There is a balance of payments problem between U.S and China. This has happened due to the excessive exports of Chinese products to U.S. China has been manufacturing products in cheaper rates and has been exporting it to other countries like U.S. at low prices. The effect of this is that the local manufacturing sector faces a huge set back. The reason being that the sales of the locally manufactured products fall. This leads to a balance of payments problem. This leads to a trade deficit and the imports of U.S are more than its exports. Hence there is an imbalance.