Analyze the relationship among balance of payments, interest rates, exchange rates, domestic prices, economic growth and employment, international reserves and money supply.

Influence of balance of payments deficit

A country's balance of payments deficit will generally lead to the downward fluctuation of its currency exchange rate; If the deficit is serious, the local currency exchange rate will fall sharply. If the monetary authorities in this country are unwilling to accept such consequences, they will intervene in the foreign exchange market, that is, sell foreign exchange and buy their own currency. On the one hand, it will consume foreign exchange reserves, and even cause the depletion of foreign exchange reserves, thus seriously weakening its ability to pay abroad; On the other hand, it will form a domestic monetary tightening situation, push up interest rates, affect domestic economic growth, and then lead to an increase in unemployment and a relative and absolute decline in the growth rate of national income.

From the specific reasons for the formation of the balance of payments deficit, if it is caused by the trade balance deficit, it will lead to an increase in domestic unemployment. If the capital outflow is greater than the capital inflow, it will cause a shortage of domestic funds, which will affect economic growth.

Influence of balance of payments surplus

A country's balance of payments surplus can certainly increase its foreign exchange reserves and enhance its ability to pay abroad, but it will also have the following adverse effects:

1. will generally make the exchange rate of domestic currency rise, which is not conducive to the development of its export trade, thus aggravating the unemployment problem in China.

2. Surplus can certainly increase domestic gold and foreign exchange reserves, but it will also increase domestic money supply and aggravate inflation.

3. It will aggravate international friction, because a country's balance of payments surplus means the balance of payments deficit of the relevant countries, which is easy to cause the other party to take retaliatory measures.

For developing countries, the balance of payments surplus is often caused by excessive exports, which means that the reduction of domestic available resources is not conducive to the economic development of developing countries.

Balance of payments adjustment policy

The balance of payments adjustment means that governments can choose include fiscal policy, monetary policy, exchange rate policy, direct control, incentives and restrictions on entry and other measures. These policies and measures will not only change the balance of payments, but also bring other effects to the national economy. Governments take different measures to adjust the balance of payments according to their national conditions.

1. Fiscal policy

Macro-fiscal policy refers to the policy of China government to manage the demand of national economy by adjusting tax revenue and government expenditure. It is usually used as a means to regulate the domestic economy. Because the change of total demand can change national income, prices and interest rates, and start the income and monetary adjustment mechanism of international payments, fiscal policy has become a means of international payments adjustment.

When a country has a balance of payments surplus, the government can promote the balance of payments through expansionary fiscal policy. First of all, reducing taxes or increasing government expenditure will double the national income through tax multiplier or government expenditure multiplier, and imports will increase accordingly because of the existence of marginal import tendency. Secondly, demand-driven income growth is usually accompanied by the rise of price level, which has the function of stimulating imports and restraining exports. In addition, in the process of rising income and prices, interest rates may rise, which will stimulate capital inflows. Generally speaking, the expansionary fiscal policy has a greater impact on the trade balance than on the capital account balance, so it is helpful for a country to restore the balance of payments in the case of a surplus balance of payments.

On the contrary, when a country has a balance of payments deficit, the government can promote the balance of payments through tight fiscal policy. First of all, increasing taxes or reducing government expenditure can reduce national income, thus reducing imports accordingly. Secondly, curbing aggregate demand will reduce the inflation rate or price level, which will be beneficial to exports and curb imports. Of course, tight fiscal policy may lead to lower interest rates and stimulate capital outflows. The government generally pursues a tight fiscal policy under the conditions of full employment and high inflation, so its basic role is to reduce the balance of payments deficit.

2. Monetary policy

Macro-monetary policy refers to the policy of a country's government and financial authorities to realize the demand management of the national economy by regulating the money supply. In developed capitalist countries, the government generally adjusts the money supply by changing the rediscount rate, changing the statutory reserve ratio and conducting open market operations. Because the change of money supply can change interest rates, prices and national income, monetary policy has become a means to adjust the balance of payments.

The rediscount rate refers to the discount rate determined by the central bank when commercial banks discount unexpired bills, which determines the market discount rate and interest rate. When a country has a balance of payments deficit, the central bank can raise the rediscount rate, push up the market interest rate and promote the balance of payments. First of all, the rise in interest rates in the country will attract capital inflows or restrain capital outflows, resulting in a capital account surplus. Secondly, rising interest rates will curb investment and consumer demand, limit price increases and income growth, thus promoting exports and reducing imports. When a country has a balance of payments surplus, the central bank can promote the balance of payments by reducing the rediscount rate.

The statutory reserve ratio is the ratio of reserve to deposit stipulated by law. Under normal circumstances, commercial banks rarely hold excess reserves, so the statutory reserve ratio determines the scale of credit currency. The government changes the statutory reserve ratio in order to regulate the domestic economy, which can affect the balance of payments by changing interest rates, income and prices. Sometimes, the government can adjust the balance of payments by setting different statutory reserve ratios for non-resident deposits and resident deposits, thus affecting the international flow of capital.

Fiscal policy and monetary policy are often used together. For example, a table.

Represents the coordinated use of fiscal policy and monetary policy

Economic situation, fiscal policy and monetary policy

Recession and expansionary contraction of deficit

Recession and the expansion of surplus

Expansion and deficit contraction

Expansion and residual contraction expansion

Fiscal policy and monetary policy have obvious limitations as means of balance of payments adjustment. This is mainly manifested in the fact that the fiscal or monetary policies adopted to solve the imbalance of international payments may conflict with domestic economic goals. Therefore, we must pay attention to the timing when choosing fiscal policy and monetary policy to achieve balance of payments.

3. Exchange rate policy

Exchange rate policy refers to a country's policy to adjust the balance of payments by adjusting the exchange rate of its local currency. When a country has a balance of payments deficit, the devaluation of the government can enhance the international competitiveness of export commodities and weaken the competitiveness of imported commodities, thus improving the country's trade balance. When a country has a long-term balance of payments surplus, the government can promote the balance of payments through currency appreciation. In order to ensure the relative stability of the international exchange rate, the International Monetary Fund stipulates that member countries can adjust the exchange rate only when there is a basic imbalance in the balance of payments.

4. Direct control policy

Direct control policy refers to the policy measures that the government directly intervenes in foreign economic exchanges to achieve balance of payments adjustment. The above-mentioned balance of payments adjustment policies are obviously indirect and rely more on the market mechanism to play a regulatory role. Direct control can be divided into foreign exchange control, financial control and trade control.

(1) foreign exchange control. Foreign exchange control refers to a government's administrative intervention in foreign exchange transactions and international settlement through relevant institutions. The foreign exchange management institution is usually the central bank. In some countries, the Ministry of Finance or the State Administration of Foreign Exchange controls foreign exchange.

The International Monetary Fund holds a negative attitude towards foreign exchange control in principle. Article 8 of the Agreement of the International Monetary Fund requires member countries to pay the current account of the balance of payments without restrictions, not to take discriminatory measures to re-exchange the exchange rate, and to exchange the accumulated currency of the other member country at any time at the request of the other member country. Article 14 requires the signatories of this article to submit an annual report on the progress of the abolition of foreign exchange control to the International Monetary Fund, and to consult with the organization on relevant matters.

(2) Financial control. The financial control of the balance of payments refers to the government's policy means to control the prices and costs of import and export commodities through relevant institutions, so as to adjust the balance of payments.

Common financial control measures in various countries include: ① import tariff policy, such as increasing tariff rate to limit the quantity of imports, or reducing tariffs on some imported means of production to support the development of domestic import substitution and export substitution industries; (2) export subsidy policies, such as price subsidies for export products and export tax rebates; (3) export credit policy, such as official financial institutions providing preferential loans to domestic exporters or foreign importers, discounting exporters' bills at preferential interest rates, and the government providing credit guarantees to exporters or exporters' banks.

(3) Trade control. Trade control refers to the government's policy means to directly limit the import and export quantity. The government can alleviate the balance of payments deficit by strengthening trade control.

Trade control measures commonly used by countries include: ① import quota system, that is, the government stipulates the quantity limit of a certain imported commodity in a certain period; (2) Import license system, that is, the government restricts the types and quantities of imported goods by issuing import licenses; (3) Formulate strict import technical standards, including health and quarantine conditions, safety performance indicators, technical performance regulations, packaging and labeling regulations, etc. ; (4) Discriminatory purchasing policy, that is, requiring large enterprises in government departments to purchase domestic products as much as possible and restricting their purchase of imported goods; Discriminatory tax policy, that is, the government imposes higher sales tax, consumption tax and license tax on imported goods; ⑥ The state monopolizes foreign trade business and prohibits private individuals from engaging in import and export trade.

5. International coordination of balance of payments adjustment policies

When adjusting the balance of payments, all governments take their own interests as the starting point, and the adjustment measures taken may have an adverse impact on other countries' economies, so that other countries will take corresponding retaliatory measures. In order to maintain the normal order of the world economy, governments around the world strengthened the international coordination of international balance of payments adjustment policies after the war.

(1) Determine the general principles of balance of payments adjustment through various international economic agreements. GATT stipulates the principles of non-discrimination, tariff protection and tariff concessions, elimination of quantitative restrictions, prohibition of dumping and export subsidies, consultation and mediation. The international monetary fund agreement stipulates the principle of multilateral settlement, cancels foreign exchange control and stops competitive currency depreciation. These principles focus on trade and financial liberalization, and ease the contradictions among countries by restricting countries from adopting adjustment policies that harm others and benefit themselves.

(2) Establish international economic organizations or provide financial services to deficit countries through international agreements to alleviate the problem of insufficient international liquidity. The International Monetary Fund (IMF) issues various loans to member countries to solve the temporary balance of payments difficulties, and creates special drawing rights to supplement the international reserve assets of member countries. General loan arrangements and currency swap agreements require the countries concerned to promise to provide a sum of money, which will be used by deficit countries to alleviate the balance of payments deficit and stabilize the exchange rate under certain conditions.

(3) Establish regional economic integration groups to promote regional economic integration and balance of payments adjustment. At present, the regional economic integration groups in the world economy mainly include preferential trade arrangements, free trade zones, customs unions, and the same market and economy. One of the most successful is the European Union. It liberalized the international movement of goods and factors, formulated agricultural policies and unified the currency.

(4) Establish an organization of raw material exporting countries to improve the balance of payments of raw material exporting countries. Unequal exchange is an important reason for the long-term balance of payments deficit of many developing countries. In order to resist the manipulation of raw material prices by monopoly groups in raw material consuming countries, many raw material exporting countries, mainly developing countries, have established many raw material exporting organizations, such as the Organization of Arab Petroleum Exporting Countries, the Joint Committee of Governments of Copper Mining Exporting Countries and the Cocoa Producers Union. In particular, the Organization of Petroleum Exporting Countries (OPEC) has greatly raised the price of oil by limiting production and raising prices, which has played a great role in reversing the balance of payments of oil exporting countries.

(5) Coordinate various economic policies through various international conferences to improve the effectiveness of economic policies, especially the balance of payments adjustment policies.

The economic policies of countries can influence each other and may offset each other. Policy coordination by world leaders through international conferences can improve the effectiveness of policies. For example, the leaders of the seven western countries hold regular summits to coordinate policies such as finance, currency and exchange rate, which has alleviated the contradictions among them to some extent and improved the effectiveness of balance of payments adjustment measures.