2.1.4 Balance of payments Flashcards
What is the balance of payments (BoP)?
The Balance of Payments (BoP) for a country is a record of all the financial transactions that occur between it and the rest of the world.
What are the 2 sections of the BoP?
/The current account
/The financial and capital account
Explain what the current account is?
The current account: all transactions related to goods/services along with payments related to the transfer of income.
Explain what the financial and capital account is?
The financial & capital account: all transactions related to savings, investment and currency stabilisation.
Why is the BoP called the balance of payments?
It is called the BoP as the current account should balance with the capital/financial account and be equal to zero. If the current account balance is positive, then the capital/financial account balance is negative (and vice versa).
What is the most important account in the BoP?
The Current Account is often considered to be the most important account in the BoP. It records the net income that an economy gains from international transactions.
How does a current account deficit occur?
A Current Account deficit occurs when the value of the outflows is greater than the value of the inflows. Usually occurs when the imports > exports.
How does the current account surplus occur?
A Current Account surplus occurs when the value of the inflows is greater than the value of the outflows. Usually occurs when imports < exports.
What is a macroeconomic aim to do with the current account?
The UK government has a macroeconomic aim to get their Current Account balance as close to equilibrium as possible. Most years it tends to run a small deficit. Export led economic growth would help it become positive. However, with increasing income and wealth in an economy, the value of imports rises.
