What should be done in order to see the rate of economic growth, taking Balance of payment (BOP) as a macro economic parameter. And also how the relationship between economic growth and BOP. What are the variables should be taken in order to see the relationship between economic growth an BOP, if there exist the relationship between these two.
Current account contributes directly to GDP in a positive way if exports > imports.
When it comes to BP, capital flows determine whether BP is positive or negative. Countries with higher growth rates than their partners used to have a negative BP, that is negative CA and positive capital flows. The key here is whether capital flows are Financing private investments of high productivity, so a negative negative CA can be financed easily and GDP can continue to run with a high pace for the foseable future.
Dear Abhijit,
A standard textbook such as Dornbusch, Fisher, and Startz, 10 edition, “Macroeconomics,” 2008 MacGraw-Hill discusses the BOP influence from the “Monetary Approach to the Balance of Payments” point of view. It considers the balance between “net change in foreign assets” (dNFA) and the sum of change in high-powered money (dH) and the change in bank’s extension of domestic credit (dDC). (see p. 525)
Keynes focused on how net export (NX) (Balance of Trade part of the BOP) affects growth as Y = C+I+G +NX. A post-Keynesian, Adrian Woods, “A Theory of Profits”, Cambridge Press, 1975, p. 145 says that “foreign trade may exercise an important indirect influence on the growth rate…through its effects on fiscal policy.”
I therefore refer you to those two sources for further explanations. You may want to consult the method of export led growth that developing countries were following in the 1950-1970s. You may consult V. Corbo “Development Policies beyond Export-led Growth” in “Advances in Macroeconomic Theory.” Edited by Jacques Dreze, 2003, Palgrave Macmillan.
BOP has two accounts: cuurent account and capital account. The position of each of these accounts can impact on growth either via fiscal position in case of current account depending on the structure of the export sector or via monetary position due to network financial asset position as monetary base is the sum of NFA+NDCredit. It also depends on the extent of economic diversification or currency strength. However, growth wc is increase in output can boast BOP via export.
The growth of a country is said to be balance-of-payments constrained if the growth rate consistent with a current account equilibrium (or a sustainable growth of overseas borrowing) is below the maximum growth of the economy determined by the maximum growth of supply-side factors.
A balance of payments surplus means the country exports more than it imports. It provides enough capital to pay for all domestic production. The country might even lend outside its borders. A surplus may boost economic growth in the short term.
Growth rates, relative prices, and rates of return drive national saving and investment decisions. These decisions most directly determine the balance of payments.
The purpose of balance of payments statistics is to provide a comprehensive account of the economic relations between a country and the rest of the world. They describe the trade in goods and services, the financial flows in return for these goods and services, and income received or paid abroad.
There are two main sources of economic growth: growth in the size of the workforce and growth in the productivity (output per hour worked) of that workforce. Either can increase the overall size of the economy but only strong productivity growth can increase per capita GDP and income.
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BOP is a key indicator, but does not lead to economic growth itself.
Furthermore on the line of Stephen I. Ternyik, above key point explanation, I add that for the BOP which is the key to economic growth, reduction of mean is must, and correct distributions what leads to economic growth. And behind all its the production is the core and under the current situation mass natural production, ie, crops, must be focused on immediately.
Regards,
Fatema Miah
Am in agreement with your observation, dear Fatema Miah, that the *politics of distribution*is overlooked in most economic growth models and modelling, with or without BOP indication. However, almost all academic economists are afraid to grab this *tiger* by the tail: the reason for this scientific deficit is not that they are afraid of not being elected to the Vatican council, but missing out on being on the Nobel Prize League.
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Leontief, Wassily. 1982. “Academic Economics.” Science 217(4555): 104-107.
Academic Economics: Irrelevant Theories and Misunderstanding of a Real Economic System
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