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According to some economic theories, the long-term deficit on Balance of Trade

with significant percentage is likely to bring about a monetary crisis. However, we
can not merely base on those theories to come to the conclusion that the surplus is
always good and the deficit is always bad. There are two sides to every issue. To
determine the impact of deficit or surpluses requires by far a lot of macroeconomic
factors to assess:

 I can give you a clear illustration of the United States, on the

Balance of Payments during the period 2013 – 2016, it is often in
deficit (only in surplus in 2016). This is without doubt not a bad sign
for the world's largest economy like the United States. As explained
in question 5, developed countries have various reasons for
maintaining their BoP in deficit.
 Similarly, the Balance of Payments of a country which is in surplus
is not always a good thing. Inefficient use of domestic / foreign
capital can cause waste and may come in for future liabilities.

Overall, the positive or negative influence of Balance of Payments does not depend
entirely on deficit or surplus, but also on the direct / indirect capital structure, on
identifying potential risks and bringing practical policies out for the economy to
make efficient use of available capital and to attract foreign investment.


a. Inflation

Inflation is a sustained increase in the general price level of goods and services in
an economy over a period of time. When the price level rises, each unit of currency
buys fewer goods and services. Similarly, it causes the value of the domestic
currency to fall. Therefore, the civilains will have to pay more money to buy goods
and services than before.

The drop in inflation rates of Vietnam and China has led to the surplus on their
Current Account.
When consumers can purchase more goods and services at the same level than
before, they will prefer domestic consumption. Hence, it lessens the demand for
foreign goods and brings about the drop off for imports. Additionally, because the
domestic product prices decline so that the exports to the international market at
cheaper prices will increase the competitiveness. As a result, the exports increase.
Because the volume of imports (cash outflow) is more lesser than exports (cash
inflow) so that the Current Account will achieve surplus.

The inflation rate of the United States experienced an upward trend over the
period. Consequently, its Current Account has achieved deficit.

On the contrary, when consumers have to pay more money to purchase domestic
goods and services, they will prefer imported goods because of good quality,
safety. Moreover, domestically upward prices also bring down the disparity with
foreign prices. For those reasons, that country will import more to meet the needs
of consumers and lead to the rise of imports. Besides, because the domestic
product prices increase so that people abroad have to pay more for the goods which
they were buying from your country. So your exports will decrease because people
will try to look for alternatives for the same goods which they were buying from
you. Because the volume of imports (cash outflow) is larger than exports (cash
inflow) so that it will cause a deficit in Current Account.

b. GDP

There is a formula that shows the correlation between GDP and the Current
Account: GDP = C + I + G + (Ex - Im)

GDP: National Income

Costs: Consumers Expenses

Invesment: Civilians Investment

Government: Government Expenses

Ex: Export

Im: Import
Under the condition that other factors remain unchanged, when a country spends
less than the return, its Current Account will achieve surplus and here comes the
deficit if the spending / investment exceeds the return.

If CA > 0: GDP > (C + I + G)

If CA < 0: GDP < (C + I + G)

With USA: Particularly, as people's incomes increase, the demand for goods and
services also increases along with prices, so that people tend to consume more
imported goods. As a result, the supply of imported goods will increase and exports
will decrease due to higher prices than before. Consequently, it will lead to a
deficit in the Current Account, similar to the case of inflation. In short, when GDP
increases, the volume of imports larger than exports will make the Current Account

With VN & China: In contrast, countries with declining GDP, more exports than
imports, make the Current Account surplus. Specifically, people with low demand
for goods which is equivalent to whether their incomes are merely enough to meet
normal consumption or not enough for them to spend more to cover their needs.
Therefore, domestic product prices are not on the upward trend and demand for
foreign goods is not high-pitched. Furthermore, the price of exported goods
remains unchanged or becomes cheaper will attract international exports so that its
volume may be higher than the volume of imports. As a result, it will achieve

c. Goverment Control

There is a formula that shows the correlation between national policies and the
Current Account: (Sp - I) + (T - G) = CA

Sp: Private Savings

Invesment: Civilians Investment

(T – G) = Taxes – Government Expenses = Government Savings

The Current Account will be deficient when government investment expenditure

exceeds tax revenues (considerable public debt and annual fixed costs)
 (T - G) < 0 will lead to shortages and increase the personal savings from
civilians is not enough to make up for that shortfall.

In order to improve the shortage, the government can carry out some policies to
reduce the amount of investment such as raising interest rates on investment loans
or increasing the required reserve to encourage the businesses to invest less.
Moreover, we can reduce government expenditures by reducing debt, fixed annual
costs or increasing export taxes ... With such an appropriate adjustment, the
Current Account will achieve surplus.

8. China hold a Foreign-exchange reserves that goes far beyond the international
routine. It is also the world's largest in term of scale currently. This phenomenon
occurs because:

 China's reserves are mainly from Current Account surpluses, which are
highly stable. China also has reserves from the Capital and Financial
Accounts as China continues its double surplus for many years.

The purposes of using Foreign-exchange reserves are:

 Implement monetary policy and exchange rate policy.

 Take the precaution of the negative impact of the economy such as the
financial crisis in 2008.
 Ensure the ability to pay off foreign debt obligations. As a result, their
prestige will be increased when China borrows from international banks or
global organizations, multinational financial firms to attract direct / indirect
foreign investment.
 To limit the rise and fall of the exchange rate.
 Increase the competitiveness in the international market when goods and
services with cheaper costs are preferred and to promote its commerce with
 In 2015, the securities market of China came up with considerable
fluctuations. When the whole market collapsed after a hot progress, besides
halting the trading activities in half a year to take it into solution, it also
affected their supply and demand. For that reasons, the economy of China is
gradually declining. Its commercial partners such as Vietnam, Brazil, Japan
and Germany... were also influenced and withdrew capital from China little
by little. Encountered the jeopardy of divestment by foreign investors, China
introduced a large amount of foreign-exchange reserves to temporarily
compensate the deficit. This action led to a drop in foreign-exchange
reserves after 2015 but helped China avoid the threat of sudden capital
 China has a large foreign-exchange reserves which is a sign that it is
restraining the appreciation of the domestic currency. In particular, when the
domestic currency rises, assets held in foreign currencies will depreciate.
Then the large amount of foreign currency that China is holding can cause a
huge loss when the currency appreciates. Therefore, China needs to control
the domestic currency at a low level by means of enacting measures to
devalue their currency. This is also one of the reasons for China's
devaluation of the yuan.


China (according to IMF: adjustably pegged exchange rate system)

China is the second largest economy in the world. Exchange rate of

USD / CNY seems quite unsteady through two phases:

Phase 1 (2013-2014): The USD / CNY exchange rate generally increased

over the years, the fall on demand for domestic currency led to its devaluation.
China became more competitive on international markets and achieved the rise on
domestic growth and foreign trade: total export of 2013 was 2,355.594 million
yuan and 2014 was 2,462,902 million yuan.

Phase 2 (2015-2016): The USD / CNY exchange rate fell sharply which
showed the rise in value of their domestic currency and the Balance of Trade (the
volume of imports and exports of goods and services) was declined.


As we can see from the exchange rate chart of Vietnam which is quoted in
US dollars shows that Vietnam is devaluing its currency.
The volume of exports increased each year (except for 2015) proving that
the value of goods and services was not so expensive and easy to export.
Moreover, its competitiveness on the international market also soared steadily
compared to other countries while the domestic currency was undervalued.
Nevertheless, imports also tended to increase at a faster pace than exports and
formed the narrow in the gap between imports and exports. The devaluation of
Vietnam’s currency was rather slow and less volatile than China. The cause of this
phenomenon is mainly due to the impact of the yuan devaluation which brings
about the fall of the domestic currency of Vietnam because China is an important
commercial partner of Vietnam in the international market.