2.1.4 - balance of payments Flashcards
What is the balance of payments?
A record of all financial dealings over a period of time between economic agents of one country and all other countries.
What is the current account?
Records payments for the purchase and sale of goods and services.
What is the capital and financial account?
Records flows of money associated with saving, investment, speculation and currency stabilisation.
What parts is the current account split into?
- trade in goods
- trade in services
- income and current transfers
What is trade in goods?
the difference between exports of goods and imports of goods eg. raw materials or finished goods
What is trade in services?
services traded in or out of the country eg. a holiday to Spain by a British family is an import as money leaves the UK and goes to Spain.
What is income and current transfers?
Wages, profit, interest, dividends can be repatriated into the country eg. a Polish person may send the money they make in the UK back to Poland. Current transfers are usually done by governments, when they transfer money in or out of overseas organisations such as the EU. Income and current transfers can be split into primary and secondary incomes. Primary income is the result of loans of FOPs abroad eg. interest, profit, dividends, whilst secondary income is mainly government transfers to overseas organisations eg. EU.
What is a current account surplus?
exports are greater than imports, so the current account is positive
What is a current account deficit?
Imports are greater than exports, so the current balance is negative
How can the current account balance be impacted by other macroeconomic objectives?
- High economic growth may mean that the current account is at a deficit, because increased demand leads to increased imports. During times of high unemployment, the current account deficit tends to improve
- Governments tend to want export led growth, which could improve the current account balance, possibly leading to a surplus, however a CA surplus could cause inflation.
What are the main reasons for increased interconnectedness of economies?
- the proportion of output of an individual economy which is traded internationally is growing
- more people/companies own assets in other countries such as shares, loans and businesses
- there is increasing migration between countries
- more technology being shared on a faster basis
How should the interconnectedness of economies affect the current account balance?
Countries have become more interdependent so a change in the economic condition of one country will affect another, since the quantity they import/export changes. In theory, all current balances should add up to zero as what one country exports another one imports.
