Sample Essay on Impact of Balance of Payment on Economic Growth

Sample Essay on Impact of Balance of Payment on Economic Growth

The growth of any economy is tied to an array of factors, which are mostly intertwined. Among these factors is the way a country relates with the rest of the world economically. This is common through international trade, characterized by exports and imports. In this essay, you will discover how the balance of payment affects economic growth.

Firstly, the balance of payments refers to records of a country’s international transactions. This denotes how an economy relates to other economies of the world. A negative balance of payment occurs when a country has a debt. In other words, such an economy owes other economies. It sometimes occurs because of high-interest rates or high monetary exchange rates. While this may sound less hurtful, a negative balance of payments can have devastating effects on the economy. In essence, when the deficit is too high, this may result in inflation, because of other factors like skyrocketing prices of goods, services, and unfriendly interest rates, which repel investors from other countries. The U.S economy is a good example of a negative balance of payments when the National debt hit the ceiling. At this point, the Federal government had no option but to reduce expenditure and increase levies. However, this faces political obstacles, with some leaders arguing against implementing such policies, which allows higher taxes on goods and services available for purchase in the market.

The United Kingdom also has a negative balance of payments. This is because the country buys from other countries more than what it exports. Economists argue that manufacturing patterns have recently changed, shifting to countries like India and China. This means, economies like the UK, which dominated the global market previously because of massive exports, are facing stiff competition. Nonetheless, an increase in the demand for imported products would signal the local firms to venture into specific goods and services that were initially supplied by the foreign market. Additionally, this is likely to have an impact on employment, as manufacturers will venture into limited production because of the market constraints. In the end, layoffs would come in handy to reduce the government expenditure, and increase its GDP.
Some theorists argue that when there is high economic growth, this could have negative implications on the balance of payments. For example, high aggregate demand means that the local producers cannot meet the needs of people, opening a door for imports. When the demand for imported products and services shoots, this is likely to lead to trade deficits. This is a common cause for economies that experienced self-sufficiency in the past because of their endowment with local manufacturers.

It is important to note that economic growth can be realized when trade deficits exist, without worsening the balance of payment. This is because the causes of these deficits are usually cyclic and structural. For example, imports exceeding a country’s exports could be because of competition between local producers and the international market. Another important factor that comes into play is the exchange rate. For instance, strong sterling means that the cost of imports falls, allowing the UK to export expensively, and leading to low demand for exports. This in turn will increase the demand for imports.

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