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Bankruptcy

Because of its ideal climate, Ecuador can produce is a component of the current account. When adding the
bananas more efficiently than can the United States; net flow of funds arising from services to a nation’s bal-
therefore, Ecuador has an absolute advantage over the ance of trade, one obtains the balance on goods and serv-
United States in the production of bananas. In contrast, ices (also recorded in the current account). Finally, net
however, the United States has an absolute advantage over unilateral transfers (one-way flows by individuals, govern-
Ecuador in the production of most other products. Given ments, and businesses) are included in a nation’s current
these absolute production possibilities, both the United account as well.
States and Ecuador stand to benefit by engaging in the Across global markets, it is not uncommon to observe
production (and subsequent trade) of those products the buying and selling of both real assets (plant and equip-
which each can produce most efficiently. Since exchange ment, land) and financial assets (stocks, bonds). Such
is voluntary, nations will (most typically) not trade with transactions are recorded in the capital account of a
one another unless the outcome is mutually beneficial. nation’s balance of payments. One last category of inter-
Nevertheless, the gains realized by each of the trading national transactions involves those arising among govern-
partners may not necessarily be equal. ments and central banks. These transactions are recorded
Smith also stated that “any time a nation has an in the official reserve account of a nation’s balance of pay-
absolute advantage in the production of two goods or ments.
services, the nation has a comparative advantage in the While unimpeded free trade tends to promote the
production of that good or service where the absolute greatest benefits arising from international specialization,
advantage is greater” (p. 315). In other words, if a nation the importing and exporting of some goods and services is
has a two-to-one absolute advantage in the production of controlled by the U.S. government (and the governments
one product and a three-to-one absolute advantage in the of other nations as well). Three of the most common
production of another product, the comparative advan- impediments to trade are tariffs, quotas, and embargoes. A
tage lies with the product with the larger (three-to-one) tariff is a tax levied by the government on the importation
ratio. Smith went on to add that “even though a nation of goods. An import quota sets a physical limit on the
has an absolute disadvantage in the production of two amount of goods that may be imported during a given
products, it has a comparative advantage in the produc- period. An export quota does the same for a nation’s
tion of that product in which the absolute disadvantage is exports. Finally, an embargo (import or export) is
less” (p. 316). For example, even though a nation has a employed when a government wishes to completely halt
disadvantage in the production of a certain product, if all imports or exports of a specific product.
that disadvantage is small compared to its disadvantage in
the production of other products, it still has a comparative SEE ALSO International Trade
advantage with the former product.
BIBLIOGRAPHY
Gottheil, Fred M. (2005). Principles of economics (4th ed).
MONETARY TRANSACTIONS
Mason, OH: Thomson Pub.
When the United States buys goods from another coun-
Smith, Allen W. (1986). Understanding economics. New York:
try, it will usually pay for those goods in the currency of Random House.
the exporting country. Many international transactions
U.S. Bureau of the Census. Foreign Trade Division.
involve the exchange of money between nations. The bal- http://www.census.gov/foreign-trade/statistics
ance of payments is an accounting record of the difference
between the amount of money that a country receives
(known as inpayments) and the amount of money that it Gary P. Tripp
pays out (known as outpayments). A positive overall bal-
ance of payments means that a country has realized more
aggregate inpayments than outpayments over a period
(typically one year). In contrast, a negative balance of pay- BANKRUPTCY
ments exists when a country pays out more money than it In 2005 the U.S. Congress enacted profound changes to
takes in. the Bankruptcy Reform Act of 1978. Known as the Bank-
Any transaction that involves a flow of funds between ruptcy Abuse Prevention and Consumer Protection Act of
countries is recorded in one of several accounts within a 2005, the amendments were designed to correct perceived
nation’s balance of payments. The largest single account in abuses by debtors who allegedly took advantage of the
the overall balance of payments is, for most countries, the pro-debtor tone and provisions of the 1978 statute. The
current account. The balance of trade, as noted above, emphasis has been shifted from a pro-debtor enactment to
records the flow of merchandise exports and imports and one favoring creditors.

ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION 49