Balance of Trade

The balance of payments accounts capture two sides of an equation: the current account and the capital account. The current account side of the ledger covers the flow of goods, services, investment income, and uncompensated transfers such as foreign aid and remittances across borders by private citizens. Within the current account, the trade balance includes goods and services only, and the merchandise trade balance reflects goods only. On the other side, the capital account includes the buying and selling of investment assets such as real estate, stocks, bonds, and government securities.

If a country runs a capital account surplus of $100 billion, it will run a current account deficit of $100 billion to balance its payments. If a country is buying more goods and services from the rest of the world than it is selling, the country must also be selling more assets to the rest of the world than it is buying.

The necessary balance between the current account and the capital account implies a direct connection between the trade balance on the one hand and the savings and investment balance on the other. That relationship is captured in the simple formula:

Savings - Investment = Exports - Imports

Thus, a nation that saves more than it invests, such as Japan, will export its excess savings in the form of net foreign investment. In other words, it must run a capital account deficit. The money sent abroad as investment will return to the country to purchase exports in excess of what the country imports, creating a corresponding trade surplus. A nation that invests more than it saves--the United States, for example--must import capital from abroad. In other words, it must run a capital account surplus. The imported capital allows the nation's citizens to consume more goods and services than they produce, importing the difference through a trade deficit.

Now, foreigners can use dollars to purchase U.S. assets: stocks, bonds, bank deposits, government debt, real estate, businesses. When Toyota buys land and equipment for a factory in the United States, when a British investment fund buys stock in a U.S. corporation, when a German bank purchases U.S. Treasury bonds, then the United States is said to be "financing" its current account deficit by selling assets. In 2002, foreigners acquired $612 billion in U.S. assets.

The United States has run persistent and increasing current account deficits since the 1980s, and foreigners have used the dollars to stake significant claims on U.S. assets. At the end of 2007, the value of U.S. assets owned by foreigners exceeded the value of foreign assets owned by U.S. residents by around $3 trillion. This is the reason the United States is often said to be a debtor nation, with a net debt to the rest of the world of. This "debt" is denominated in their own currency. For that reason, dollar is weakening.

Forecasts by The Economist magazine

From the Economist Intelligence Unit
Source: Country Forecast

India:
The booming economy is likely to keep the United Progressive Alliance (UPA) government, led by the Indian National Congress, in power in 2007-08. The prime minister, Manmohan Singh, will continue to push for economic reforms but will be constrained by the practicalities of governing on a coalition basis. The outcome of the next general election, which must be held by May 2009, is likely to be another coalition government. Monetary policy will continue to be tightened during 2007, but will be eased gradually thereafter. Real GDP growth is forecast to remain very strong during the forecast period, averaging 8.3% in fiscal year 2007/08 (April-March) and 8% in 2008/09. Inflationary pressures will be difficult to control. Strong domestic demand will lead to a significant widening of the merchandise trade deficit over the forecast period, but surpluses on the services and transfers accounts will limit the current-account deficit to less than 3% of GDP in 2007-08.

USA:
The Republican president, George Bush, faces a Congress dominated by the Democrats. Given constitutional checks and balances, this will make it difficult for both Democrats and Republicans to advance their often competing agendas. Instead, both parties will focus on preparing for the 2008 presidential and congressional elections. Federal finances have improved, but there is limited resolve to tackle looming holes in healthcare and public pensions programmes. Monetary policy tightening has ended, with the next move by the Federal Reserve (central bank) expected to be an interest rate cut in September 2007. But higher interest rates are having an adverse effect on the housing market, with knock-on effects on the consumer sector. Real GDP growth is thus forecast to slow from 3.4% in 2006 to 2.5% in 2007. Growth will pick up to 2.8% in 2008, but will not be as consumer-led as in recent years. Imbalances in the economy could trigger a much less benign scenario. The US dollar will come under further downward pressure in 2007 from the prospect of lower rates. The current-account deficit will average 5.6% of GDP in 2007-08.

China:
The main priority for the ruling Chinese Communist Party over the next two years will be to maintain political stability in order to ensure the success of its 17th party congress, due in late 2007, as well as the Olympic Games in the capital, Beijing, in August 2008. As the party congress approaches, the president, Hu Jintao, will continue to strengthen his influence through the appointment of allies to key positions. Real GDP growth will slow from an estimated 10.5% in 2006 to 9.5% in 2007 and 9% in 2008. The government will continue in its efforts to rebalance the economy, as it attempts to make growth less dependent on exports and investment, while introducing measures to boost consumption. The current-account surplus will narrow from an estimated 7.8% of GDP in 2006 to 6.3% of GDP in 2008.

The Red Signal: Rise of Communism

Karl Marx introduced the “communist society” concept in the 19th century, where the means of production are jointly owned by the society, a society that aims at achieving equitable economic growth.

The communist society is a great concept. And that is what it should remain – a concept!

Every communist society has ultimately failed its objective. The Soviet Union failed and China today is more capitalist than the capitalists. But that does not mean we have seen the last of Communism.

Communist ideals are impressive enough to influence any person into total submission. It sounds real and its arguments sound rational. Communism has a tendency to spread rapidly because of its populist agenda. But a society having income disparities is more vulnerable to Communism. And communism feeds on income inequalities. Income disparity today is a global phenomenon. It is one of the main issues which the Democrats have taken up for the presidential elections in the United States. Corporate bosses in the US are getting fat pay packages and this has caught the eye of the media and especially the shareholders and the working middle class. In India income disparity was always present but today the rural-urban divide has increased further. The only silver lining about India is that income inequalities in the urban population have reduced and urban population as a whole has prospered thanks to globalization. But the ‘trickle down’ effect hasn’t yet fructified. China hasn’t changed much from the time of the communist revolution, in terms of income disparity. Before the revolution power and money was in the hands of the monarchy, today it is in the hands of members of the communist party. In China a rural worker who has migrated to urban areas for work does not get the same rights as the urban worker. While the urban worker gets social benefits (School, healthcare) a rural migrant has to work for lower salaries. There is a lot of unrest within China which it has been trying to suppress. Only time will tell how well they are able to manage it.

Today communism is seen with disrespect. So even the proponents of communism wont call themselves communists! Disguised communism is what I am talking about, like the one sweeping across Europe today. Take for example the French presidential candidate Segolene Royal, she is not only the first female candidate in the French presidential race she is also a die hard communist. The Labour Party in the UK was always a communist party in disguise. In India we have the UPA with communist allies. So communism isn’t dead yet.

Communism sounds great in theory but it will always be a red signal for economic rationality.