The Balance-of-Payments Equilibrium Growth Rate

Abstract

In the long run a country cannot grow faster than the rate of growth of output consistent with balance-of-payments equilibrium on current account.¹ We call this growth rate the balance-of-payments equilibrium growth rate (y_B). In this chapter the import and export functions specified in Chapters 8 and 9 are used to determine the balance-of-payments equilibrium growth rate and to highlight its major determinants. An attempt is then made to estimate the balance-of-payments equilibrium growth rate for a variety of countries, including the United Kingdom, using some simplifying, though not unrealistic, assumptions. It is shown how closely the actual growth experience of countries approximates to the rate of growth of exports divided by the income elasticity of demand for imports (i.e. x/π), except in the case of Japan, which has grown much slower than its balance-of-payments equilibrium rate and built up a massive balance-of-payments surplus. The findings of this chapter underline the importance of raising the rate of growth of exports to improve the balance of payments permanently, and lend support to export-led growth models (which are considered in the next chapter).