13) Balance Of Payments Flashcards
What does the current account of the balance of payments mean
⚫️a record of a country's trade in ➡️exports ➡️imports ➡️investment income ➡️with the rest of the world
What does balance of payments mean
➡️a recored of financial transactions between ➡️one country
➡️and the rest of the world
➡️over a period of one year
What is the four section that the current account is divided into
➡️balance of trade in goods
➡️balance of trade in services
➡net investment income
➡️net current transfers
What is meant by balance of trade in goods
Values of good exported-values of good imported
What is meant by balance of services
Value of service exported-value of services imported
What is meant by net investment income
Values of interests, profits and dividends earned from overseas assets - values of interests, profits dividends paid to foreign holders of UK assets
What is meant by net current transfers
⚫️money transfers between government
➡️e.g the UKs contribution to the EU, aid to developing countries
What is the current account balance made of
Balance of trade in goods+ balance of trade in services+net investment income+net current transfers
What is the current account deficits
⚫️when the value of exports is less than the value of imports
➡️this causes a leakage from the circular flow
➡️AD decreases
What is a current account surplus
⚫️when the value of exports is greater than the value of imports
➡️causes an injection into the circular flow
➡️increase in AD
What is the causes of the UK current account deficit
⚫️uk economic growth (2997-2007) based on consumer-led boom
➡alot of consumer demand was spent on imported goods
⚫️the value of the £ was higher against our main trading partners up to 2007
➡️UK exports expensive in foreign markets
➡️imported goods cheaper
➡️demand for uk exports decreased, while demand for imports into the uk increased
⚫️uk productivity has not improved quickly as our major competitors
➡️causing higher unit costs for UK goods and services
➡️causing prices of uk goods and services to be higher than competitor countries
➡️reducing demand for UK exports
⚫️global economic downturn has reduced UK exported goods
What are the consequences of the UK current account deficit
✅A deficit means better living standards for UK citizens
➡️as we are consuming more than we are producing, leading to greater consumer wealth fare
➡️deficit can be paid back by running a trade surplus later on
✅a small deficit for a large rich economy, has no real economic significance
➡️especially if it remains less than 5% of overall GDP
❎a deficit due to poor competitiveness is a course for concern
➡️likely to get worse in longterm
➡️tackling the problem may require expensive supply-side policies which would take time to work
