chapter
B
Pages 21

Foreign currency receipts from the sale of goods and services are called exports and appear as a credit item in what is termed the current account of the balance of payments. Foreign currency payments for purchases of goods and services are called imports and appear as a debit item in the current account. Three major approaches to balance of payments adjustment have been developed by economists, corresponding to how deficits are viewed. First, the elasticities approach sees deficits as a result of distorted relative prices or uncompetitiveness in trade. Second, the absorption approach views deficits as a result of excessive expenditure relative to domestic output, so that favourable adjustment must imply that expenditure falls relative to output. Third, the monetary approach ascribes deficits to an excess supply of money relative to demand, so that adjustment can be successful only if it raises the demand for money relative to the supply.