When were talking about trade, you’ll probably hear the words “investments”, “portfolios”, “capital”, “debit and credit”, and BOP (thats balance of payments). These words to global trade advisors and financial aficionados are like second nature, but to those just breaking into the world of International Business, they can be daunting words. Let’s use an example that will give you a visual picture of just how everything comes together to understand how countries measure international business activity, balance payments, and look at exchange rates and altered trade prices.
If you have happened to pick up a newspaper in the last two years, or even flipped through the news channels, you are most likely aware of the current situation in Greece. Greece, a country not only known for their gorgeous architecture and historic origins, is also a top exporter in goods such as petroleum and olive oil. However, in the past few years, Greece’s finances have turned to the same ruins that the country is so famous for.
This is due in part to the fact that Greece is in debt, meaning that after Wall Street fell in 2008, global financial markets had taken a large hit, in particular Greece. It could no longer buy from markets, and was set to fall into bankruptcy.
This proved to be a large problem not just for Greece, but for the rest of the world. Countries who had long traded with Greece, invested in Greek markets, and exported valuable natural resources from the country, were now threatened. The European Commission, the professional bail outers if you will, bailed out the country for more than 240 billion dollars. Greece was so corrupt they had holds placed on their government to end tax evasion, help to stabilize markets, and build up the economy.
These global economic transactions that would normally be carried out in almost every other country, have been put on hold indefinitely. This not only hurts Greece, but the entirety of the countries that trade with it, as they now will have to pay higher prices for things that Greece would’ve normally exported for half the price.
In Greece, there are no such things as balance of payments, regulated by the governments to evaluate the general competitiveness of the domestic industry and establish an exchange rate, because the government is corrupt.
Currently, as of 2015, Greece had a negative trade balance of 19.8 billion dollars, meaning the countries imports severely exceeds its exports, affecting jobs, government, natural resources, and the economy, on a global scale.
Now, we can see how important those words like BOP, investments, capital, and service trade really are, and how crucial they are to not only building a successful domestic economy, but a successful global economy as well.
What do you think Greece could’ve done better in a situation like this, and has the United States gone through something similar in your opinion?