2:1:4 - Measure Of Economic Performance - Balance Of Payments Flashcards
What is meant by the balance of payments?
The balance of payments is a record of payments between one country and the rest of the world.
What does the balance of payments consist of?
- Current Account
- Financial account
- Capital account
What is the most significant account of the balance of payments?
Current account
What is meant by the current account?
The current account records trading goods and services, investment, income and current transfers
What does trading goods measure?
Measures the movement of tangible products across international borders.
What are the U.K.’s main exports?
Pharmaceuticals and Cars
What does the UK import a lot of?
Oil and gas
What is meant by trade in services?
Measures movement of intangible output.
What is meant by investment income?
The reward for investments in other countries.
What kind of rewards for investments does investment income comprise of?
Interest, profit and dividends
What is meant by current transfers?
The payment of money across international boundaries but has no corresponding output.
EG - Tax is paid to the EU, payments to the British military working abroad.
What is meant by a current account surplus?
Where inflows on the current account of the balance of payments are greater than outflows.
What is meant by a current account deficit?
Where outflows in the current account of the balance of payments are greater than inflows.
Give three examples of countries that have current account deficits?
USA, Spain and the UK
Is investment income part of the current account?
Yes
Current transfer as part of the current account?
Yes
Is current account surpluses and deficits part of the current account?
Yes
What is meant by the financial account?
Records money flows for investment purposes, foreign direct investment and foreign portfolio investment.
What is meant by foreign direct investment?
Buying out assets and ownership of companies in other countries
What is meant by foreign portfolio investment?
Hot money flows
What is meant by the capital account?
It puts the financial and current account in balance by recording the changes in net assets in each country.
If there is a deficit on the current account is it a problem for the economy?
No as long as the capital and financial accounts are running surpluses to cancel out the deficit.
What does a deficit of the current account show?
It can be a sign that living standards are improving.
What is meant by foreign currency reserves?
Is when one country holds a currency of another country. (Saving another currency to potentially spend)
When does the current account become a problem?
When reserves of foreign currency is beginning to run low.
What happens if there is a deficit on the current account and reserves of foreign currencies become low?
- Depreciation of the currency (Which will then lead to inflation)
– It might be a sign that the country is becoming on competitive (costs are rising relative to trade partners)
– Which can cause unemployment in the domestic economy
How can the government stop a current account deficit?
Higher taxes and cuts in government spending (however it is likely to cause a slowdown in economic growth)
What is meant by international trade?
It means that countries become more independent, relying on each other both for income (through exports) and for resources, goods and services (through imports)
Interconnectedness of economies – what will happen to one country if another experience is weak demand?
It has a direct effect on another country
When does interconnectedness of economies through international trade become a problem?
When deficits or surpluses on the current account to become persistent.
What do we call a deficit or surplus on the current account?
A current account imbalance.
What could be the cause of current-account imbalance?
– The country is spending too much
– Or a countries stage in the business cycle
– or the strength of the currency
Why may the UK face an ongoing deficit?
Because of the higher costs of production in the manufacturing sector of the UK.
When do the costs of the current account imbalance becomes significant?
Only when the deficit (or surplus) becomes unsustainable.
What is meant by sustainability?
Means that the needs of the present I met without compromising the Ability of future generations to meet their own needs.
What can a persistent deficit due to a country’s currency?
Cause it to depreciate in value
What can a government do to prevent a persistent deficit and prevent the depreciation of its currency?
The government can buy surplus currency in order to reduce supply and maintain its value.
When there is a persistent deficit the currency depreciates, What will a depreciation in the currency do?
- It will restore competitiveness
• Because imports seem more expensive and exports relatively cheap on international markets
What will happen to net incomes if there is a persistent deficit?
- Net Income leaves the country
- Demand in that country decreases
- Because of this workers may lose there jobs
• However; the Monetary Policy Committee May think it’s good as they prevent inflation.
