10.3 Balance of payments Flashcards
What is the current account?
Primarily records the trade in goods (visibles) and services (invisibles)
Also includes net income flows from interest, profit and dividends from UK assets owned overseas.
What is the capital account?
Primarily records international flows of capital such as inter-country loans or government investments overseas
What is the financial account?
Primarily records net Foreign Direct Investment (FDI)
Also includes government owned assets such as gold, currency reserves and private assets held abroad
What is Foreign Direct Investment (FDI)?
The establishment of operations or acquiring tangible assets, including stakes in other businesses located in other countries
What is portfolio investment?
This is the purchase of financial assets e.g. corporate and government bonds, securities, shares in another country
What is the impact of FDI?
Classified as a long-term direct capital flow and involves enhancement to the overall capital stock of an economy
Whilst the profits of FDI investments in the UK may return to the country of origin, it creates economic growth and employment which can boost productive potential
What is the impact of portfolio investment?
Portfolio capital flows are short-term and speculative which can create destabilising effects on the international monetary system
What has to be taken into account when assessing the consequences of investment flows?
The type of investment flow
Long or short-term
What are the 3 methods used to correct a balance of payments deficit?
Devaluation of currency
Deflationary policies
Direct controls
What are the 3 methods used to correct a balance of payments surplus?
Appreciation of currency
Reflation of domestic economy
Encouraging free trade
What does the significance of a budget surplus/deficit depend on?
The size of the deficit/surplus
The duration of the deficit/surplus
The cause of the deficit/surplus
