Balance of payments theory

It is time again for a general remark. The new French initiative to reduce the German export surplus shows a fundamental misunderstanding of the relationships in the balance of payments. It would be particularly important for the German export surpluses that inflicted the European partner’s damage.

Besides the fact that no one can force the unions and management to increase wages, a reduction of German exports (through price increases or reductions in quality) would not automatically have a passivation of the German trade balance result. Probably the balances in Germany and elsewhere remain at the previous level; it would only be exported and imported less. Only the revenues fall, and thus income and probably employment – but not only in Germany but throughout Europe.

The balance of payments is in principle always balanced, apart from statistical errors. The balance of trade as a partial balance is mirrored by the capital account. Crucial for the formation of balances in the balance of trade is the difference between savings and investment, or the difference between the sum of consumption and investment, i.e. the absorption, and the overall economic income of a country.

This is zero the trade balance is balanced. If a country saves more than invested, there is a surplus in the trade balance. If more from Germany sold in international markets than is purchased, the German economy is a loan abroad. The trade surplus was offset by a capital account deficit.

This means of course a credit debt of foreign countries. There is more consumed and invested, as is earned on income. Sometimes this is useful, namely when the country cannot finance all the investments from their own savings.

Sometimes this is less useful if namely, consumption is financed and thus the debt burden rises steadily. In Germany, it is just the opposite. This must also not make sense, because in mass unemployment, the German savings should be invested here to create new employment. The trade surplus reflects not just on the high competitiveness of Germany. An increase in wages does not necessarily lead to protect the domestic economy. For lower income due to decreased export, revenues lead to lower import demand.

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