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Theme 2 > 2.1.4 Balance Of Payments > Flashcards

2.1.4 Balance Of Payments Flashcards

1
Q

Balance of payments

A

records all financial transactions made between consumers, businesses and the government in one country with other nations

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2
Q

The Current Account

A

is comprised of the balance of trade in goods, services, net investment incomes and net transfers

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3
Q

Current account deficit

A

there is a net outflow of demand and income from the circular flow (more money flowing out)

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4
Q

Current account surplus

A

there is a net inflow of demand and income from the circular flow (more money flowing in)
- Britain runs a strong surplus in services (Ireland) but a large rising deficit in goods (Germany)

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5
Q

Examples of countries with a big balance of payments surplus

A

South Korea, Germany and China

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6
Q

Countries with a big balance of payment deficit

A

UK, Brazil

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7
Q

Outflows of foreign currency

A

negative entries (when money flows out of the country)

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8
Q

Examples of outflows of foreign currency

A
  • imported goods
  • payments to world bank
  • AID to other countries
  • when immigrants working in the country send money back to their country
    Inflows of foreign currency: positive entries (when money flows into the country)
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9
Q

Inflows of foreign currency

A

positive entries (when money flows into the country)

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10
Q

Examples of Inflows of foreign currency

A
  • Exports sold
  • UK citizens working in other countries
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11
Q

The interconnectedness of economies through international trade

A
  • Globalisation
  • Proportion of GDP that is trade is growing
  • Own more assets overseas
  • More migration
  • Technology and sharing
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12
Q

Components in the current account of the Balance of Payment

A
  • Trade Balance in Goods
  • Trade Balance in Services
  • Net Investment income from Overseas Assets
  • Net Money Transfers
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13
Q

Trade Balance in Goods in the current account of the Balance of Payments

A
  • finished manufactured goods, raw materials
  • energy products, capital technology
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14
Q

Trade Balance in Services in the current account of the Balance of Payments

A
  • Banking, Insurance, Consultancy
  • Tourism, Transport, Logistics
  • Shipping, Education, Health
  • Research, Cultural arts
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15
Q

Net Investment income from Overseas Assets in the current account of the Balance of Payments

A

Profits, interest and dividends from investments in other countries (e.g the profits from transnational businesses)

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16
Q

Net Money Transfers in the current account of the Balance of Payments

A
  • Overseas aid/debt relief
  • Private money transfers (e.g from migrants)
17
Q

Causes of a current account deficit

A
  • Poorer price and non-price competitiveness
  • Strong exchange rate affecting exports and imports
  • Recession in one or more major trade partner countries
  • Volatile global prices (e.g Commodities)
  • Recession in one or more major trade partner countries
  • Volatile global prices (e.g Commodities)
18
Q

Poorer prices in a current account deficit

A
  • Countries with higher inflation than trading partners
  • Countries with low levels of capital investments & research
  • Countries with weakness in design, branding
19
Q

Strong exchange rate in a current account deficit

A
  • High currency values increases prices of exports
  • Appreciating currency also makes imports cheaper
20
Q

Recession in major trade partner countries in a current account deficit

A
  • Recession cuts value of exports to these countries
  • Might be barriers to switching to other markets
  • e.g. UK businesses struggle to sell to emerging markets
21
Q

Volatile global prices in a current account deficit

A
  • Exporter of primary commodities might be hit by a all in world prices
  • Importing nations could be hit by higher prices for oil and gas
22
Q

Reasons for UK’s persistent trade deficit

A
  • High income elasticity of demand (Yed) for imported goods and services
  • weakness on supply-side of the economy
  • UK businesses finding it hard to finance a rise in exports (effects of credit squeeze)
  • Majority of British exports go to slower-growing countries in Europe
23
Q

UK’s persistent trade deficit (High income elasticity)

A

demand for imports grows strongly when consumer spending is rising

24
Q

UK’s persistent trade deficit (weaknesses on supply-side)

A

Low research and development spending, low rate of capital investment

25
Q

UK’s persistent trade deficit (British exports)

A

Majority of British exports go to slower-growing countries in Europe
- e.g. Ireland, Spain and also the USA. Less successful in exporting to emerging nations

26
Q

Economic problems from Persistent Trade Deficits

A
  • Loss of aggregate demand = slower real GDP growth and reduced living standards
  • Loss of jobs in home-based industries = regional decline and structural unemployment problems
  • currency weakness and higher inflation and a country may run short of vital foreign currency reserves
  • might be a reflection of lack of competitiveness/ supply-side weaknesses
27
Q

Problems from running trade surpluses

A
  • If GDP is close to capacity, a rise in the trade surplus = demand-pull inflation
  • lead to threat of
    protectionism from trade deficit nations
  • If the surplus is due to high saving / low consumption = living standards might be too low
  • might be result of exporting high-priced commodities (prices are volatile/unpredictable)
28
Q

Government macroeconomic objectives:

A

a) Economic growth
b) Low unemployment
c) low & stable rate of inflation
d) Balance of payments equilibrium on current account
e) Balanced government budget
f) Protection of the environment
g) Greater income equality

29
Q

Economic Policies to Reduce a Trade Deficit

A
  • Demand management (a tightening of fiscal or monetary policy
  • Supply-side improvements (policies to raise labour productivity and encourage start-ups with export potential)
  • Protectionist measures such as import quotas and tariffs
30
Q

Demand management

A
  • A tightening of fiscal or monetary policy = reduced real spending power of consumers = lower spending on imports (fall in M improves trade balance)
  • Lower exchange rate = reduced foreign price of exports = expensive imports = causes changes in demand
31
Q

Supply-side improvements

A
  • Policies to raise labour productivity and encourage start-ups with export potential (e.g Life sciences)
  • Investment in human capital to boost productive capacity and competitiveness in high-value industries (e.g engineering, medicine)
32
Q

What is the impact of a weak currency?

A

o Companies are cheap = negative primary income flows (e.g football companies are owned by foreigners/Cadbury is American due to weak pound = money to flow out of UK)
o Money flowing out, primary income is less
o UK used to have primary income surplus

Theme 2 (19 decks)

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