Balance of Payments The balance of payments between the U.S. and China is watched closely by corporations and investors. • What are some of the effects of shifts in the U.S.-China balance of payments on the world economy? • What is one example of a real-world industry, product, or corporation that is impacted by changes in the U.S.-China balance of payments? • What policies might the U.S. and China be able to implement to improve the world economy in regards to the balance of payments? • What role might forward markets play in these policies? Justify your position through a thoughtful discussion that draws upon the readings and lectures for this week. In addition, you should seek out a timely and relevant external information source, such as an article from a reputable news provider like The Wall Street Journal or The Financial Times. The word count for your discussion response should range between 300-500 words.
Some of the effects of shifts in the U.S-China balance of payments on the world economy include such as reduced economic growth, loss of jobs, and numerous lawsuits on infringing copyrights. According to Madura, (2018), the United States consumes a large volume of low-cost imports from China and frequently receive assistance in financing large portions of the budget and current accounts as well. China depends on the American export markets and treasury bond markets to fund large proportions of its rising stock based on foreign exchange reserves. China produces various goods and services at reduced costs in comparison to the United States, attracting buyers from the latter and other countries in the world.
China remains competitive because they have low living standards meaning they can pay workers low wages and an exchange rate that remains moderately fixed against the American dollar. An example of a real-world industry that is impacted by the changes in the U.S -China balance of payments is the technology industry. Most technological companies, like Apple Inc. and General Motors, depend on China for production and manufacturing as it is relatively cheap. There are several policies that the U.S-China can enact to improve the world economy that can focus on changing the dynamics of growth and supply-demand. They include such as expenditure reducing policies, demand management, low exchange rates, and improving the supply chain to boost the performance of the economy (Madura, 2018). Some roles might forward markets play in these policies. Increased interest rates, higher taxes, and reduced government spending could impact consumer demand through declined import demand. Low exchange rates could lead to a better way of improving competitiveness leading to decreased overseas export prices and increasing the value of imports.
There are many effects on the world economy when there is a shift in the balance of U.S. to china balance of payments, but the most important being that China as well as other trade surplus countries will overproduce items that are not being bought while deficit countries continue to over-consume. Other major effects of shifts in the U.S. to China balance of payments is the desirability of the world reserve currency to be in Yuan, a potential housing bubble due to weak monetary policies to increase both demand and consumption, and the dumping of overproduced items. An example of a real-world corporation that is impacted by changed in the U.S to China balance of payments is Walmart. Walmart depends on China for a lot of their products to keep costs low and to sell in quantity rather than quality, and when there is a shift in the balance of payments between the U.S. to China, it affects their ability to supply their stores and warehouses effectively.
When there is a shift in the balance of payments, there are few policies that can be implemented to ensure an improvement in the world economy. A long-term policy that should be implemented is the application of expenditure reducing policies that will aid in controlling the demand and spending on unwanted imports as well as policies to promote expenditure on domestic products. There should also be policies in place to promote the encouragement of domestic trade and supply, as well as the potential to attract investment opportunities in that country. In addition, policies to manage government expenses for reducing the demand for imports as well as policies to raise the productivity of the economy in hopes of increasing the export to import ratio. The government should also apply policies that are aimed at increasing the investment in education, health care, and modern infrastructure, as well as supporting new business startups.
Forward markets play a role in the implementation of these policies in various ways. Because of China’s major hold on the U.S. treasury, interest rates may lead to a capital loss if it is reduced. In a situation of currency appreciation due to the implementation of these policies, there would be huge losses in local currency, which will greatly reduce the condition of that economy while the another economy thrives.
An active example of balance of payments between the U.S. and China currently is the Coronavirus pandemic that has greatly affected China’s economy by showing a shrink in their GDP by 6.8% since 1992. Because of the Coronavirus impacting the spending of the U.S. on China imports and goods, China has seen devastating instability in their factories being able to continue production, causing mass layoffs with uncertainty of when the economy will be restored to normal.
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