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A Level Economics: Macroeconomics > 14.3 The Balance Of Paymets > Flashcards

14.3 The Balance Of Paymets Flashcards

1
Q

What is the balance of payments?

A

Record of all the currency flows into and out of a country at a particular time period

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2
Q

What are the three main accounts transactions are broken down in

A

Current account
Financial account
Capital account

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3
Q

The balance of payments must equal what

A

0

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4
Q

What is the current account?

A

Measures all the currency flows into and out pf a country for exports and imports of goods and services, together with primary and secondary income flows

previously known as income flows and transfers

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5
Q

Why is the current account important

A

Reflects economies international competitiveness and the extent to which it is living within it means

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6
Q

If a county runs a capital account deficit the finance account should be in…

A

Surplus (same vice versa)

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7
Q

Where are capital flows measured under?

A

Financial account

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8
Q

What makes up current account

A

Trade in goods and services

Investment incomes, transfers

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9
Q

What is the financial account?

A

The part of the balance of payments which records capital flows into and out of the economy

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10
Q

What are the 5 main components of the financial account?

A

Net portfolio investment
Net direct investment
Financial derivatives and employee shock options
Other capital flows
Drawing on reserves

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11
Q

If a country is living beyond its means by running a current account deficit….

A

The borrowing which finances the deficit is recorded in either the capital account or financial account

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12
Q

What are the 4 main sections of the current account?

A

Primary income flows
Secondary income flows
Balance of trade in goods
Balance on trade in services

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13
Q

Why is the current account the most important part of the balance of payments?

A

Reflects an economy’s international competitiveness and the extent to which the economy is living within its means

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14
Q

What is a current account deficit?

A

If the currency outflows in the current account exceed the currency inflows

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15
Q

What is a current account surplus?

A

If receipts exceed payments

Currency inflows in current account exceed currency outflows

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16
Q

Balance of primary income?

A

Inward primary income flows comprising both inward-income flowing into the economy in the current year generated by UK-owned capital assets located overseas, and outward primary income flows comprising income flowing out of the economy in the current year generated by overseas-owned capital assets located in the UK

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17
Q

Balance of secondary income?

A

Current transfers e.g gifts of money, international aid and transfers between UK and EU flowing into or out of the UK economy in a particular year

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18
Q

What is visible trade

A

Trade of goods

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19
Q

What is invisible trade?

A

Trade of services

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20
Q

What is the balance of trade in goods?

A

The part of the current account measuring payments for exports and imports of goods. The difference between the total value of exports and the total value of imports is sometimes called the balance of visible trade

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21
Q

What is the balance of trade in services?

A

Part of the current account, difference between the payments for the exports of services and the payment of the imports of services

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22
Q

What is primary income flows?

A

Net flows made up of mostly investment income generated from profits, dividends and interest flowing between countries

The profit income generated from overseas investment flows back to the parent company and the uk shareholders

It is an outward capital flow but income generated is current income

(Overseas investment also have a huge role to play)

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23
Q

A significant proportion of the income flows are generated from what?

A

Portfolio investment

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24
Q

What is portfolio investment?

A

Investment in financial assets such as shares and bonds

(Interest and dividend payments within the international financial system contribute significantly to primary net income flows

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25
Q

What are secondary income flows?

A

Current transfers of income arising from such items as gifts between residents of different countries, donations and charities abroad and overseas aid

(Britain has long had a negative secondary income balance caused by UK’s net contribution to the EU budget)

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26
Q

What do outward capital flows do?

A

Generate inward flows of investment income in subsequent years

Enlarges the stock of capital assets located in other countries, owned by residents and MNCs based in the country exporting capital

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27
Q

What are net income flows?

A

The difference between inward and outward capital movements

(Positive net outward capital flows over some years mean the country acquired capital assets located in other countries are greater in value than the county’s own assets brought by overseas companies)

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28
Q

What is fdi

A

Investment in capital assets in one country by a business with HQ in another nation

Very often the overseas company establishes subsidiary companies in the countries in which is it investing

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29
Q

How can long term Croatian flows be explained?

A

Partly by competitive advantage:

Flows are a response to people’s decisions to invest economic activities and industries located in countries that have a competitive advantage

This takes a long time so the flows are relatively stable

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30
Q

What is portfolio investments

A

Purchase of a country’s securities (bonds and shares) by residents of another country)

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31
Q

When do portfolio investments occur?

A

Mangers employed by financial institutions (insurance companies and pension funds)purchase charges issued by overseas companies or securities issued by overseas govs

32
Q

What has made it easy for UK residents to purchase shares and bonds that are listed on overseas capital markets?

A

The globalisation of world security markets or capital markets and the abolition of exchange controls between virtually economically developed countries

(Led to massive increase in portfolio investment)

33
Q

What are toxic assets?

A

Potential purchaser of a package of financial assets offered for sale by a bank could not know in advance whether assets in the package were of high risk and potentially little value

34
Q

What actually is hot money

A

Short-term capital movements (largely speculative)

35
Q

Why does hot money flows occur?

A

Because the owners of the funds(include companies and banks as well as private individuals) believe that a quick speculative profit can be made by moving funds between currencies

36
Q

When a currency is expected to rise—

A

People by the currency

(Hot money movements)

-also triggered by interest rates and out of currencies with lower interest rates

37
Q

What can destabilise an exchange rate?

A

Large-scale hot money flow of funds between currencies

38
Q

What can destabilise the international money system?

A

Speculative capital flows between currencies such as the dollar, pound and euro which occupy a central place in the finance of international trade

39
Q

It is likely there will be a current account surplus when..

A

Net exports are positive

40
Q

It is likely there will be a current account deficit when…

A

Net exports are negative

41
Q

Diagram for how an increase in exports can affect the national economy

A
42
Q

Describe this diagram…

A

Equilibrium point X(economy in deep recession) AD curve shift from 1 to 2 leads to real output to rise from y1 to y2 with some inflation as prices rise from p1 to p2

As full employment approaches with y2 to y3 export demand becomes inflationary rather than reflationary

Economy ends up at V on its LRAS curve

43
Q

What is export led growth?

A

In the short run economic growth resulting from an increase in exports which is one of the components of AD

In the long run economic growth resulting from the growth and increased international competitiveness of exporting industries

44
Q

What does export led growth do to this diagram

A

Shift LRAS to the right allowing for AD to increase with less inflation

45
Q

Are current account deficits a problem?

A

Short run no

Long run: greater the size greater problem is likely to be (problem likely to be serious If deficit is caused by uncompetitiveness in a countries industries)

Short run-good
Long run-bad (lowers living standards)

46
Q

In a poor country how can a current account deficit be justified?

A

Country’s need to import capital capital goods on a large scale to modernise the country’s infrastructure and promote economic development

47
Q

Do current account budget surpluss cause problems?

A

-could be inflationary (demand pull inflation if economy is initially close to full capacity)

-one country’s surplus is another country’s deficit(deficit countries may be forced to import controls from which all countries including surplus countries)

48
Q

What factors may influence a country’s current account balance.

A

Productivity: improving labour productivity is critical to supply side policy success to improve both price competitiveness and quality competitiveness of a country’s exports in international markets

Inflation: inflation relative to trading competitors (if it is higher exports lose price competitiveness which will deteriorate the current account balance (PEDs of exports and imports may also complicate things here)

Exchange rate: rising exchange rate in another country increases the overseas value of exports reducing their own price competitiveness (PEDs of exports and imports also relaxant

49
Q

What are the 3 traditional ways to fix inflation?

A

Deflation (contractionary monetary policy
Expenditure reducing policy

Direct controls(import controls, tariffs quotas ect)
Expenditure reducing policy

Devaluation (lowering exchange rate)
Expenditure switching policies

50
Q

What is an expenditure-reducing policy?

A

A gov policy aims to eliminate current account deficit by reducing demand for imports by reducing levels of AD in the economy

Conversely to reduce a current acc surplus AD would be needed to increased and spending on imports would rise

51
Q

What is an expenditure-switching policy?

A

Gov policy which aims to reduce a current account deficit by switching domestic demand away from imports to domestically produced goods

Conversely to reduce a current account surplus, the policy would aim to switch domestic demand away from domestically produced goods towards imports

52
Q

What are direct control?

A

Involve imposing quotas or even outright bans(embargos) on imports.

These direct cut or prevent expenditure on imports and as a result, people switch their spending from overseas to home-produced goods

Together with imports duties or tariffs, which make imports less price competitive, direct controls do not however the underlying cause current account deficit , namely the uncompetitiveness of a country goods and services

Because a country essentially gains a beggar neighbour advantage at the expense of other countries

53
Q

What do free market economists believe about protectionism?

A

Reduces specialisation and causes world trade, world output and economic welfare to fall.

Because if this organisation such as EU and the World Trade organisation have reduced the freedom of individual countries to impose import controls unilaterally to improve their current accounts

54
Q

If a country wants to reduce a budget account deficit it must choose 1 of these 3 methods…

A

Deflation ,devaluation or currency depreciation

55
Q

What depends upon the PED of demands for exports and imports?

A

The effectiveness of a fall of the exchange rate in reducing the balance of payments deficit

56
Q

What happens to the exchange rate when demand for exports and imports are price elastic

A

A fall in the exchange rate is likely to to reduce a current account deficit

57
Q

Diagram for the effect of a devaluation of the pounds exchange rate on the current accounts of the UK balance of payments

A
58
Q

Describe this diagram

A

On the import side (left), spending falls from area bounded p1 q1 to area q2 p2, higher import prices mean consumers switch to the now cheaper domestically produced substitutes

On the export side exports increase from area bounded p3 and Q3 to area bounded p4 and q4(overall current account improves assuming the demand for imports and exports are price elastic)

58
Q

Why is the Marshall-Lerner condition needed what what does it say

A

Why is it needed?: difficult to see what will happen to the current account when demand for exports is inelastic but demand for imports is elastic

What does it say: when the sum of export and import price elasticities are greater than unity, a fall in exchange rate can reduce deficit and a rise in exchange rate can reduce a surplus

59
Q

Diagram of the J curve effect

A
59
Q

If imports and exports are both elastic and spare capacity exists in the economy what will happen to the balance of payments and why.

A

It will deteriorate because it takes time for demand to adjust to the changes in prices and firms within the country may be unable to increase supply after a fall in the exchange rate

In the short run the Marshall-Lerner condition may not hold because elasticities of demand are lower in the short run than in the long run

(Balance of payments may worsen before it improves, known as the J curve)

59
Q

In the J curve effect why does the balance of payments initially become worse

A

The fall in the exchange rate may reduce confidence in the ides that changing the exchange rate is the most appropriate method for running a deficit in the current account deficit in he current account of the balance of payments

60
Q

What is needed for long term improvements in the current account

A

(Short term deflation devaluation and direct controls)

Long term: successful supply side policies and supply side-improvements undertaken by FIRMS within the economy

60
Q

What two conditions are needed for economy to deliver growth of exports

A

Quality competitive

Price competitive

61
Q

What is export led growth been narrowly focused on?

A

How to best increase competitiveness of UK exports to achieve sustained economic growth

62
Q

What are the two issues with consumption led growth

A
  1. Demand for imports causing a current account deficit

2, unsustainable and volatile

63
Q

Main way to achieve export led growth

A

Investment-led growth

64
Q

Diagram for reverse J curve

A
65
Q

What are the 3 pickiest of reflation to decrease a budget surplus

A

-reflating demand via expansionary monetary policy or fiscal policy, increases a country’s demand for imports

-trade can be liberalised by removing import controls

-there have been calls on countries with larger payments surpluses (China) to revalue to reduce global payment imbalances

66
Q

What are the two reason a large budget surplus is not desirable?

A
  1. Other Countries will have to run deficits to even out(has to balance) and have the negatives of a deficit
  2. Leads to Demand pull inflation
67
Q

What is primary income balance?

A

Balance between income received on UK’s overseas investments and income paid to overseas investments on UK investments

68
Q

Which country runs the largest current account deficit

A

USA

69
Q

What policy protected a country’s own industry for others overseas (think USA)

A

Protectionism

70
Q

Why would a Courtney run a current account deficit on purpose

A

Encourage a depreciation of its exchange rate

71
Q
A

A Level Economics: Macroeconomics (25 decks)

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