Balance of payment (BOP) refers to statistical record of a country’s international transactions within a certain period of time. BOP is done quarterly and annually in the form of a double-entry bookkeeping. When all international transactions are recorded, the payment and receipts should be equal, however, this is not the case in most occasions. BOP is used to determine whether a country has a deficit or a surplus. Unfortunately, the United States has been operating on consistent trade deficits since 1976 (Trading Economics, 2016). America’s trade gap of $44.5 billion in June 2016 shows that the American government needs to adopt aggressive measures to address the chronic BOP deficit.
America’s massive BOP deficit has become a perennial economic problem. The deficit is determined by the flow of investment in and out of the country. The BOP captures the current and the capital account, with the current account responsible for the flow of goods, investment income, remittances and uncompensated transfers (Thomas, 2000). Hence, if a country is buying more goods than it is selling, it is bound to have a deficit as is seen in America’s situation between 2006- 2016. Thomas (2000) also notes that the steep oil prices could explain the increasing BOP in America.
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Many assumptions and explanations have been adopted to explain America’s BOP deficit. A prominent assumption is the change in national saving or investment. National saving has declined since the 1950s, and it declined further in the 1980s (Friedman & Schwartz, 2008). The increasing labor productivity in America is another assumption. By the end of the 20th century, America experienced a drastic increase in productivity which increased the investment rate, and lowered the saving rate leading to a bigger current account deficit.
Other assumptions are the increasing U.S. population and development programs, which often push the government to import more goods than they export.
Various solutions have been suggested to address the BOP situation. The solutions affects different stakeholders in the economy, particularly the workers, investors, businesses and the government. This analysis focusses on solutions that can be implemented by the government. A traditional solution the quantitative changes in exports and imports. The government can choose to reduce the quantity of imports, and rely more on domestic products through monetary and fiscal policy that discourages the entry of imports into the country.
The American government can also adopt protectionist measures. Protectionist measures is known to attract retaliation in the international market, hence many nations will increase trade barriers thus limiting its exports to America. Lastly, the deficit can be reduced if America enters a recession.
Each of the alternative solutions above has its advantages and disadvantages. Quantitative changes in imports and exports affects most stakeholders in the economy, however, it is the most effective solution and it is quite hard to implement as monetary, fiscal and non-monetary policy changes are required.
The third solution of entering a recession is known to reduce BOP deficit in that America will no longer have the ability to import more goods. Additionally, American goods will be cheaper, and other nations will be encouraged to import from America.
Recommendation and Implementation
The best policy is effective import and export management. Governments with BOP surplus have managed to control their demand and limit spending on imports. The American government can encourage spending on domestic products and also boost the competitiveness of the local industries to reduce imports.
To sum up, despite the constantly increasing BOP, the current deficit is not an economic emergency, rather it signifies rising domestic demand. America can gradually reduce its BOP through additional exports, and reduction in imports.
Friedman, M., & Schwartz, A. J. (2008). A monetary history of the United States, 1867-1960 . Princeton University Press.
Thomas, C. (2000). Balance-of-Payments Crises in the Developing World: Balancing Trade, Finance and Development in the New Economic Order. Am. U. Int'l L. Rev. , 15 , 1249.
Trading Economics. (2016). United States Balance of Trade: 1950-2016. Retrieved from: http://www.tradingeconomics.com/united-states/balance-of-trade