Kennedy and the Balance of Payment

Decent Essays
Kennedy and the Balance of Payment
Assignment 1- FINA6676-2


Hang Pham- A00366703

What is President Kennedy’s U.S. balance of payment problem?
In the 1960s, the United States was experiencing the balance of payment problem when its trade balance was in a substantial deficit, the US dollar was under an attack and a massive amount of gold flew out of its official reserve. Such issues in the balance of payment if exist for a long time can be a threat to the whole economy because balance of payment closely interacts with key macroeconomic variables such as GDP, exchange rates, interest rates and inflation rates. However, it was not an easy task for the Kennedy government to solve the balance of payment problem as
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The third option to solve balance of payment problem was to impose trade barriers and capital control. On one hand, this would help to restrict import and capital outflow, thereby recover the trade deficit. On the other hand, this policy was contrary to U.S. effort to liberalize the world trade. Economic growth of the U.S and its allies would also be affected.
All three options directly address problem of the current accounts and financial and capital accounts. While deflation and capital control can remedy both current account and financial and capital accounts, devaluation only has immediate impacts on the current account. (Figure 1 bellow illustrates direct impacts of each option to these accounts.) However, as exchange rates, interest rates, economic growth and balance of payments are interacted, when one components of the balance of payment improves, the other accounts will also recover. For example, when import demand increases, demand for the dollar also increases, and therefore can prevent the outflow of gold from official reserve. That being said, all three options can solve U.S balance of payment problem; however, there must be cost incurred that Kennedy government have to consider.

Figure 1
Question 3:
Can any lesson be drawn from President Kennedy’s balance of payment problem in the 1960s to address the
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