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Economic Development of Central America Econ. 4200 - Spring 2004 – Dr. Taylor - page 20 / 153

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3. Balance of Payments - Exports (X) & Imports (M)

B of P = PxX – PmM

Px - vector of prices of exports

Pm - vector of prices of imports

Surplus = excess of exports over imports

Deficit = excess of imports over exports

… effect of exchange rates on BoP.

4. Domestic Absorption (A) = The national expenditures on both home-produced goods and imports.

- Not equal to B of P...

If A>GDP => trade deficit

If A<GDP => trade surplus

- How does a nation pay for domestic consumption (absorption) above and beyond  GDP? => Draw down domestic savings and/or borrow from abroad (increase external debt).

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