Absorption Analysis Method of Balance of Payments Adjustment

International Payments Adjustment Through Absorptive Analysis

Introduction

International payments are important for the global economy as a whole. There are two primary ways of adjusting payment imbalances between countries. One is through payments adjustments and the other is through adjustment of real account items. Adjustments to payment imbalances are made through changes in the prices of traded goods or services, exchange rate policy, capital flows, and changes in money supply. The aim of this paper is to analyze the absorptive process of international payments adjustment in detail.

Payments Adjustment

Payments adjustment is one of the primary methods of achieving an international payment balance. When an imbalance of payments occur between two countries, one of the economies typically experiences a deficit while the other might experience a surplus. This can be addressed by adjusting the prices or exchange rates of traded goods and services in order to make them more competitive in international markets. This can cause the balance of trade to change, and in turn reduce the payment imbalance.

Exchange Rate Policy

The exchange rate policy of a country can influence the ability of international payments to correct itself. Exchange rate policies are used by countries to influence the prices of their currencies in relation to other currencies, as well as the level of demand for them in the foreign exchange markets. If a country has a strong exchange rate policy, it can make its currency more expensive in relation to other currencies, and in turn limit the amount of capital that can be borrowed from other countries. This can lead to an appreciation of the country’s currency. Alternatively, if a country has a weak exchange rate policy, it can make its currency cheaper in relation to other currencies, allowing more money to be borrowed from abroad. This can lead to a devaluation of the country’s currency.

Capital Flows

In addition to exchange rate policy, capital flows are a major factor in international payments adjustment. Capital flows refer to the movement of capital between countries. This movement can be either direct or indirect. Direct capital flows involve the movement of funds from one country to another, while indirect capital flows involve the movement of funds from one sector of the economy to another. In the context of international payments adjustment, capital flows provide a means of financing deficits and restocking surpluses.

Money Supply

In addition to exchange rate policy and capital flows, changes in the money supply can also affect international payments adjustment. When the money supply of a country increases, it can lead to an appreciation of its currency, as the extra money can be used to purchase goods and services from abroad. Conversely, when the money supply of a country decreases, it can lead to a devaluation of its currency as fewer funds are available for use in international transactions.

Conclusion

Overall, international payments adjustment is achieved through changes in the prices of traded goods and services, exchange rate policy, capital flows, and money supply. All of these measures can either help to reduce the size of payment imbalances or prevent the occurrence of larger payment imbalances. By understanding the absorptive process of international payments adjustment in detail, nations can better manage their current account deficits and surpluses.

Balance of payments adjustment absorbs analysis is one of the effective tools for countries to adjust in international payments. As we all know, the balance of payments of a country generally includes three parts: current account, capital account and international reserve account.

To justifiy the balance of payments adjustment absorbs analysis, this study will focus on the effects of sucking money into the current account of a country. In economics, all economic activities are divided into three main areas: production, consumption and investment. In order to have a reasonable balance of payments adjustment, it is necessary to make reasonable adjustments in these three areas.

The most common way to adjust the current account balance is to absorb from the consumption sector. This means that consumers reduce consumption so that the current account balance can be adjusted. The consumption sector absorbs less money and the current account balance is improved. On the other hand, absorbing from the production sector is to reduce the production of products and services. This means that less money flows into the current account balance, but the improvement of current account balance is not so obvious.

Last but not least, absorbing from the investment sector is another way to adjust the balance of payments. Generally, this means reducing foreign capital inflows, reducing foreign direct investment and reducing the rate of return of foreign capital. By reducing the money entering the current account, the balance of payments can be improved.

In conclusion, absorption analysis is a very important strategy for countries to adjust their current account balances. By adjusting their business activities, appropriate absorption adjustments can help to improve their balance of payments. Therefore, it plays an important role in international economic activities.