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Negative balances are not necessarily terrible news, though. Most advanced economies import physical goods and raw materials such as food. The reason for this is that it is cheaper to buy from other countries where the costs of production are cheaper. In a country with an advanced economy, primary and secondary industries are likely to be depressed, or uncompetitive. Thus they are restricted to niche and specialist goods. Tertiary industry will likely make a lot of money for the country, and specifically employees of such companies. As the general level of wealth in a country rises, the people will demand more and more goods, and these must be imported to satisfy demand. Thus a negative balance of payments can be generated, but is not necessarily indicative of negative economic activity. |
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Negative balances are not necessarily terrible news, either. Paul Samuelson has argued that the consistent negative balance of payments that the United States exists is due confidence in United States currency. Because the United States dollar is generally regarded extremely stable, dollars which are exported are held by persons overseas and there is no pressure to return them to the United States. So essentially the United States is able to export pieces of paper and get real goods and services in return. |
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One curious thing about balance of payments is that the world is running a positive balance of payments with itself. The total reported amount of exports in the world is greater by a few percent than the total reported amount of imports. This is widely believed to be the reason of transactions intended to launder money or evade taxes. |
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The figures are usually split into visible? and invisible balance figures. The visible balance represents the physical goods, and invisible represents everything else, eg. services.
If the balance of trade is positive, then the economy has received more money than it has spent. This may appear to be a good thing but may not always be so. An example of a economic in which a positive balance of payments is generally regarded as a bad thing is Japan in the 1990's. Because Japan had a consistently positive balance of payments, it had more currency than it could effectively invest. This led to huge Japanese overseas purchases of items such as real estate which were of questionable economic useful. Furthermore the protectionist measures that created the positive balance of payments also caused the price of goods in Japan to be much higher than they would have been had imports been freely allowed.
Negative balances are not necessarily terrible news, either. Paul Samuelson has argued that the consistent negative balance of payments that the United States exists is due confidence in United States currency. Because the United States dollar is generally regarded extremely stable, dollars which are exported are held by persons overseas and there is no pressure to return them to the United States. So essentially the United States is able to export pieces of paper and get real goods and services in return.
Factors that can affect the balance of trade figures include:
One curious thing about balance of payments is that the world is running a positive balance of payments with itself. The total reported amount of exports in the world is greater by a few percent than the total reported amount of imports. This is widely believed to be the reason of transactions intended to launder money or evade taxes.
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