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Balance of Payment

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Yuki Chen

on 27 November 2013

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Transcript of Balance of Payment

Balance of Payment
Case Study

Question 2
Balance of Payments Problems

Question 3
Three Possible Options for Kennedy
Question 4
What was the aftermath of Kennedy’s actions and the US balance of payment crisis?
BoP Calculation for the 1960
Current Account
Net trade balance was $4738 billion in 1960 compared $ 972 billion in 1959

US products and service are becoming less competitive

Value of the US dollar had decreased
Historical Pattern of Selected Accounts
Question 1
Capital Account
Deficit of $3509 billion during 1960
Outflow of US investments to Europe
Less competitive Interest rates
Acquisition of the Venezuelan oil
Sues crisis
Reserve Account
Foreign central banks replaced US dollar with gold for their reserve

Increase Supply of US dollar lowering Exchange rate

US had to sell gold reserve with a value of $1700 billions
Kennedy’s Causes of Concerns & Foreign Policy Reflection
Exchange Rate
Trade Barriers
Trade Barriers
Make American exports relatively cheaper and increased export demand
1960, under Bretton Woods system, the rest of the world would lose confidence in the dollar.
Adjust Exchange Rate
Business 435
Djama-Jihade Aden Ali
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Restrict American investment abroad
Import Barriers
Less disposable income causes weak consumption ability, less demand for imports good and reduced currency outflow.
Foreign investment would increase due to low operation cost in US, Dominated benefits flow to foreign companies.
Not desirable to set barriers or limit the investment for US’ allies since the rapid economic development was viewed as the best defense against the spread of communism.
President John F. Kennedy entered office in 1961
The payments deficit undercut relations with NATO and US allies
The dilemma was how to maintain economic growth

Kennedy’s solution to the balance of payments crisis was to attack the problem on a variety of fronts:

Tax cuts
Monetary controls
Gold transactions

Kennedy’s administration was able to reduce the deficit, but not able to stop the outflow of US dollars and gold.
Overseas military costs rose from $5.5 billion in 1955 to $7.2 billion in 1962
Investment outputs to developed countries continued
US BoP for the 1960
Problems faced by the Kennedy’s administration
Prior events that lead to the 1960 situation
Options available to Kennedy to overcome the problem
The aftermath of the BoP crisis
Balance of Payments Problems
The EEC was in 1957
The creation of the EEC had negative impact on U.S balance of trade
Fewer exports were being sent from US to EU.
It created a deficit in the current account and a surplus in the capital account

The Bretton Woods System
Gold pegged to dollar
U.S owned 75% of the world’s gold stock
The U.S couldn’t balance the surplus they had in their current account with net investment they made abroad
The dollar started decreasing
European countries lost confidence in the U.S. dollar and started exchanging them for gold

Bretton Woods System
Countries opened up to the idea of free trade.
The GATT introduced the most-favored-nations clause.
Some countries were left out.
The United States’ progress to a free world trade was slow.
Few American products were being sent out while the imports were still high.

The Slow Progress
Kennedy’s attempts to solve the problems were unsuccessful
Long term effect of Kennedy’s actions collapsed the BWS in 1973
Kennedy did have a trade off between his options
Main trade off: Healthy Internal economy Vs. Powerful international presence
US trade balance is a major factor for US BoP

Loss of US International Power
Options’ trade offs
Commitment toward low trade barriers
Long-term unilateral transfer deficit
in $,000 billions
Full transcript