Story: Balance of payments
A country’s balance of payments account gives a snapshot of its economic and financial dealings with the rest of the world. Since the early 1980s New Zealand has tended to have a deficit of 5–6% of its GDP on its balance of payments current account. Some commentators think this is unsustainable, while others observe that New Zealand continues to be able to borrow to make up the difference.
Full story by C. John McDermott and Rishab Sethi
Main image: A 'floating' dollar
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What is the balance of payments?
The balance of payments current account measures the money that comes in and out of New Zealand, including:
- payments for goods
- payments for services
- investment income
- money sent to relatives overseas
The financial and capital accounts record longer-term movements, including the money borrowed to cover any deficit on the current account.
Statistics New Zealand, a government department, works out the balance of payments four times a year.
Managing balance of payments crises
If more money has gone out of New Zealand than has come in, the country will be in deficit on the current account.
This was the case for New Zealand during most of the 20th century history. Until the 1980s, banks or governments fixed deficits by:
- restricting imports
- raising interest rates
- making New Zealand’s currency cheaper (a devaluation) compared to other currencies, so that the goods and services New Zealand exported were cheaper for foreigners and imports cost New Zealanders more.
In 1985 the government floated the New Zealand dollar, which meant its value was set by what buyers were prepared to pay for it. Balance of payments deficits have continued, but governments respond with longer-term measures such as trying to increase domestic savings, rather than short-term ones, as before.