13 - THE BALANCE OF PAYMENTS

Abstract

This chapter discusses about the balance of payments. The distinctive feature of all such foreign trade is that it poses a monetary problem and the ordinary problems of buying, manufacturing, and selling. Any imbalance of payments that results from the import-export activities of nations means the accumulation of claims by citizens of one country on citizens of another. In order to eliminate balances using the mechanism mentioned an international standard reserve asset is needed that can be used for the settlement of debts between nations and also as a unit of account in which currency values can be expressed. The foreign exchange market is a world-wide market with instantaneous communications to all the dealing centers around the world. The result is that a system of world-wide prices prevails. If a nation has a temporary adverse balance on its balance of payments the problem can be solved in the way. When a country suffered an adverse balance of payments and its own reserves appeared to be inadequate to withstand the speculative pressure, the members exercised drawing rights against the Fund.