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Balance of Payments

[Based on an EMail in 1999. From the Webmaster to an Accountant in the USA.]

A little 'warm up' discussion, on one simple question in Economics. I know nobody to discuss Economics with here and have not got round to cold-calling any College Lecturers or Professors.

It seems to me that whenever Economic issues are discussed, for example on TV, some important matters are overlooked and some assumptions are made, or are implicit, but these have little basis other than being traditional viewpoints.

It is hard for an amateur like me to believe that the experts have got it all wrong but... Lets take just one item here and see what marks I get:

In the UK they talk about the 'Balance of Payments'. It means the difference between the total value of the country's exports and the total value of imports. It is apparent that a negative result is always regarded as a bad situation, i.e. when importing more than exporting. The emotion that comes across is one of loss.

I believe it is all an illusion. Here is my analysis:

My business, say 'UK Cheese Incorporated', buys a consignment of French cheese from 'Industrie Fromage (IF)' in Paris and we spend some pounds at our bank to obtain the French francs that we need to pay for the cheese. Our bank obtained the francs from a French bank and ultimately what happens is that we get the cheese in our UK store and a French bank gets a deposit of English pounds. Also the bank of 'IF' gets a deposit of French francs.

Now these pounds are not useful, directly, in any country except the UK. Ultimately, if their value is ever to be realised they need to come back to the UK and be spent on some goods that are on sale in England. So there will be a balancing export in due course. It seems that neither the French nor the English economy really suffers from our cheese purchase. Nor does either benefit preferentially.

If the same analysis is applied to each individual cross-border transaction, it shows that the balance of payments, whether positive of negative is irrelevant, in the overall context of trade between countries that is extended in time.

And let's see the result in another way. For example, if the UK (or USA) wants to export more to Japan it would seem a good tactic to import some Japanese goods. Something they make well or cheaply and that we can use.

The key point here is NOT so much about import or export tactics, and the complete picture is no doubt more complex than I suggest, but about the fact that an established viewpoint does not seem to have a real foundation.

Example 2 would be that here we have circumstances that make the pound very strong against lots of other currencies. All the time the media and the people THEY CHOOSE to interview keep complaining about how bad the strong pound is for our economy. I leave the analysis to you, but I believe it is another nonsense, symptomatic of two issues:

  • That the mass media prefer scandals, miseries and bad news to good news or the truth.
  • That proper financial assessments just are not done and maybe most Economists really do not know their job...
My first degree was in Mathematics and PhD in Mathematical Modelling and Computer simulation. I suspect a valid Economic model has not been produced. I know that every Government and maybe every University has big computers and Economic simulations, but perhaps they have the wrong programs and give out the wrong answers!

That's enough for now. I will be very interested in your reply.

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Copyright - John Peirson 2000
Keywords - Import, export, balance of payments, economics, pound, model, simulation