Balance of payments income imbalance

International income imbalance

Introduction

The global economic landscape is constantly changing due to the rapid advancement of technology, globalisation and liberal trade policies. With this ever changing landscape comes a more interconnected and interdependent world, in which countries rely heavily on one another for economic prosperity. Despite the interconnected nature of the global economy, there is still a relatively large disparity in the incomes of many countries. In general, wealthier countries tend to consume more resources and produce more wealth, as opposed to poorer countries. This is known as income inequality, and is a significant issue, both internationally and domestically.

Background

Income inequality occurs when one group of people has significantly higher or lower incomes than the average. According to the Organisation for Economic Co-operation and Development (OECD), income inequality is the highest it has ever been in many countries and has been increasing over the past decades. The OECD estimates that the income of the richest 10% of the population is now nine times greater than the income of the poorest 10%, compared to seven times greater in the 1980s.

Income inequality has been recognised by many international organisations as a major cause of economic, social and political instability. It has been linked to poverty, economic growth, health and education outcomes, as well as social unrest.

Causes of income inequality

There are many factors that contribute to income inequality, both at home and abroad. These include:

• High unemployment: Economic stagnation leads to an increase in unemployment, which in turn leads to poverty and economic insecurity.

• Low wages: Wages in some countries tend to remain stagnant, meaning workers do not benefit from increasing economic growth. This widens the gap between those who are thriving and those who are struggling.

• Inequality of access to resources: Those with access to resources, such as education, healthcare, capital and land, naturally have an advantage in the global economy. This increases their income levels while leaving those without resources at a disadvantage.

• Gender inequality: Women are more likely to be underpaid or excluded from the workforce altogether, forcing them to turn to informal employment and subsistence activities to make ends meet.

• Tax systems that favour the rich: Tax systems that are regressive and benefit large multinational corporations disproportionately hurt the poor, leaving them with less access to resources and income.

Conclusion

Ultimately, the income inequality disparity between countries has the potential to negatively affect global economies and create a more unstable world. Despite new technologies, developing countries are still most affected by income inequality, as the richest countries spread their wealth to benefit from the resources and economic opportunities of poorer countries. It is important for countries to work together to reduce income inequality, both domestically and internationally. This can be done through implementing progressive taxation systems, providing education and healthcare, and encouraging employment opportunities. This would ultimately increase economic security and ensure that everyone has access to necessary resources.

International payments imbalances in income refers to when a country is unable to spend or produce as much as it has in terms of international transactions. This can result in a situation of over-dependence on a few trading partners and can also lead to persistent current account deficits.

Generally, when there is an international payment imbalances in income, it reflects an imbalance between domestic savings and domestic investment. This is typically due to the trade deficit, which is caused by the country importing more products from other countries than it is exporting. Imports are typically seen as being more expensive than domestically produced products, so the country incurs a deficit in the international payments.

Additionally, there can be international payment imbalances in income due to foreign direct investments. When a country receives a large amount of foreign funds, this can generate an “inflow” of funds that is greater than local savings and investment. This can increase domestic demand, but if the funds received are used to buy foreign assets, it can also result in a balance of payments deficit.

Furthermore, there can be imbalances due to disregarding exchange rates of different currencies. This commonly occurs when countries import or export goods and services in different currencies, and transactions are priced in the wrong currency. This can lead to large differences in exchange rates and an overall deficit in the international payments.

Finally, an international payment imbalances in income can be due to capital flight. Capital flight is when individuals or businesses take their assets and invest them outside of their country of origin. This leads to a decrease in assets that could be available for domestic consumption, investment, or exports. It can also lead to a decrease in the total amount of money available for domestic consumption due to the capital being exported.

Overall, international payment imbalances in income occur when a country’s imports are greater than its exports, when investments from foreign sources are too high, when there are discrepancies in exchange rates, and when capital flight occurs. This can lead to an overall balance of payments deficit, and a prediction of economic stagnation. Therefore, it is important for governments to monitor and adjust their balance of payments by adequately preparing for different international payment scenarios.