lördag 9 december 2017

Balance of payments surplus - good or bad?

A balance of payments deficit indicates that the value of the wealth coming into a country is higher than the value of the wealth going out, which is exactly as it should be. Goods are always worth more to the buyer than to the seller, and worth more in the country to which they are imported than they are in the country where they are exported form. That is why international trade takes place. A balance of payments surplus means that wealth is leaving the country in exchange for claims on wealth flowing back in return ie foreign exchange balances. A country with a balance of payments surplus is experiencing a loss of wealth.

Sterling balances held abroad are the driving force behind UK exports since they create demand for UK goods and services, and generate foreign investment in the UK. Thus a country must import in order to export. That is why the the EU Single Market is so damaging, since it sets up an obstacle against imports from the rest of the world.

This is pretty much the opposite of what is generally believed these days about international trade. The prevailing view is a revival of the mercantilist idea which dominated until it was refuted by the classical economists, starting with the Physiocrats, and then developed by Smith, Ricardo, J S Mill and Henry George. The last named wrote the most accessible work on the subject, “Protection or Free Trade”, published in 1884 and still in print.

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