2.1.4 Balance of Payments Flashcards
What is the balance of payments?
The balance of payments is made up of the current account and the capital account.
What is the current account?
The current account measures the inflow and outflow of goods, services, investment incomes and transfer payments.
What are the 4 components of the current account?
1) Balance of trade in goods (visibles) [-]
2) Balance of trade in services (invisibles) [+]
3) Investment income [+]
3) Transfers [-]
What is a current account deficit?
When the value of imports is greater than the value of exports, this acts as a withdrawal from the economy. (Current balance is negative).
What is a current account surplus?
When the value of exports is greater than the value of imports, it acts as an injection into the economy. (Current balance is positive).
Why can’t all countries achieve a surplus simultaneously?
Due to the ‘Zero-sum’.
Exports flowing out of one country will count positively, but the country they flow into will see them as imports which will count negatively.
One country achieving surplus, by definition, must lead to another country having a deficit
What is export-led growth?
It is an economic strategy that focuses on increasing a countrys’ exports to stimulate economic development.
What are the benefits of ‘export-led’ growth?
1) Funded from outside own economy – provides a boost even if domestic economy is struggling.
2) Achieves economic growth and improved current account simultaneously.
- Growth based on increased domestic spending would worsen the current account
What are the 5 causes of a worsening current account?
1) Real incomes
2) Exchange rate
3) State of the world economy
4) Protectionism
5) Non-price factors
How do real incomes cause a worsening current account (trade deficit) ?
- A rise in real incomes boost consumers’ spending power.
- As consumers spend more, some will be on imports.
- More spending on imports means a worsened current account.
How does protectionism cause a worsening current account (trade deficit) ?
- A reduction in the use of tariffs/quotas could lead to an increase in imports.
- In short run may harm the balance of trade.
How do exchange rates cause a worsening current account (trade deficit) ?
- A stronger pound leads to cheaper imports and dearer exports (SPICED).
- Increase in demand for imports, fall in foreign demand for exports.
- Worsening balance of trade
What does SPICED stand for?
S - Stronger
P - Pound
I - Imports
C - Cheaper
E - Exports
D - Dearer (more expensive)
How does the state of the world economy cause a worsening current account (trade deficit) ?
- Causes a recession in a significant trading partner.
- Reduces demand for domestic goods (exports).
How do non-price factors cause a worsening current account (trade deficit) ?
- Changes to the level of quality of goods and services will affect the demand for imports and exports.
- Technology and innovation can play a key role.
