Net deficit: Balance of Payment Q?

As you most probably know, the UK has a current account deficit. Therefore if the balance of payment is to balance, a surplus is needed in the capital account to make up the different. However, if there is still a net deficit on the combined current and capital accounts, then the Government uses the reserves (foreign currencies) to finance it. My question is, if the majority of imports/exports are made in the private sector (as in the UK) why is it the Government funding this shortfall and not the private sector.

2. Surely, there shouldn’t be a shortfall, because when we imported the products/services from abroad, we already paid for them by (selling sterling, and purchasing foreign currencies) to pay the exporters.

bullboy8 said:

As you most probably know, the UK has a current account deficit. Therefore if the balance of payment is to balance, a surplus is needed in the capital account to make up the different. However, if there is still a net deficit on the combined current and capital accounts, then the Government uses the reserves (foreign currencies) to finance it. My question is, if the majority of imports/exports are made in the private sector (as in the UK) why is it the Government funding this shortfall and not the private sector.

2. Surely, there shouldn’t be a shortfall, because when we imported the products/services from abroad, we already paid for them by (selling sterling, and purchasing foreign currencies) to pay the exporters.

Click to expand...

You ask "why is it the Government funding this shortfall", I think the answer is simply "because that is what government's do!" If you look at it from the view of microeconomics individual companies simply exist to profit, they are self-interested in the main, and even if they were of such a size that they could influence the balance of payments I don't imagine they would care to do so!

You need to look at the concepts of aggregate demand and aggregate supply. In the broadest sense governments are concerned with the total spending in the economy whether that is from overseas customers for our exports, by consumers, by the Government itself, or by firms. Whereas firms themselves are just selfish little *******s.

Are you implying that you believe individual firms should be taxed or coerced in some way in order to correct the balance of payments?

what I am saying, if, how come the G needs to cover the shortfall when it seems that there shouldn’t be a shortfall, because when we imported the products/services from abroad, we have already paid for them by (selling sterling, and purchasing foreign currencies) to pay the exporters.

There should be no shortfall....think about it.