CHAPTER 8 - The Balance of Payments

Abstract

This chapter discusses the balance of payments. The three traditional approaches to the study of balance of payments—elasticities, absorption, monetary theory—are different ways of representing the same phenomenon, as all equations describing the three approaches derive from the same basic system. The elasticities approach has its starting point in the equations of equality between the exports of one country and the imports of the other. The absorption approach states that the balance of payments surplus is equal to the value of national production minus the value of absorption, that is, the total spending by the agents of the country considered. The monetary approach to balance of payments states that the surplus of a country is equal to the difference between the quantity of money that the agents desire to hold and the quantity of money created in the country. With the model presented in the chapter, the particular assumptions implicit in some traditional models such as the Marshall–Lerner or four-elasticities models can be shown.