Balancing and Unbalancing Capital Movements
In an ideal world import surpluses and export surpluses would be balanced all the time automatically by long-term capital movements in the opposite sense. Consequently trade imbalance would not alter the status quo in respect of the size of the reserves or of the balance of international short-term indebtedness. Nor would exchange rates be affected by surpluses and deficits, except temporarily in a somewhat less ideal world in which it would be difficult to synchronise trade deficits and surpluses with long-term capital movements in the opposite sense, so that there might be surplus supply or demand in the market during the time-lag.
KeywordsExchange Rate Direct Investment Foreign Exchange Market Trade Deficit Capital Account
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