2.1.4 Balance Of Payments Flashcards
What is balance of payments?
It is a Record of money coming in and out of a country
It’s a country’s transactions with the rest of the world
What are the components of balance of payments?
Current account
Financial account
Capital account
What happens if balance of payment is in deficit and surplus?
If in deficit then current account is in deficit
If in surplus current account is also in surplus
What is current account?
Current account records payments for trade in goods/services plus the next flows of primary and secondary income.
What makes up current account?
Net trade
Net primary income
Net secondary income
What does primary income measure?
Primary income measures the monetary flows generated from owning of cross border financial assets known as investment income.
What does primary income include?
Compensation of employees - wages earned by working people.
(Investment income) - profits, dividends
Taxes on income and wealth
What does secondary income measure?
It measures the current transfers between residents and non - residents.
What does secondary income include?
Remittances money that is given by foreign workers.
Foreign trade/aid
Basically money we don’t get back
What are the two parts in current account?
And what does balance of trade in g/s equal to?
Trade in goods which are visible they include visible imports and exports that = balance of trade
Trade in services which are invisibles they can include invisible export and imports
Balance of trade in g/s = balance of visibles plus balance of invisibles
What causes a current account surplus?
Weak exchange rate
High income abroad
Low relative inflation
Strong investment
High disposable income
What are the consequences of a current account surplus?
Inflationary pressures
Rise in exchange rates making imports cheaper
Higher wages
High inflation compared to other countries making domestic goods expensive
What causes a current account deficit?
Strong exchange rate
High relative inflation at home
Economic growth
Consumer demand
What are the consequences of a current account deficit?
Imports up
Ad down
Inflation down
Growth down
Weak exchange rate
Low wages
By referencing the macroeconomic objectives what will happen if uk has persistent current account deficit?
Unemployment will rise
Goods and services become uncompetitive
By referencing the macroeconomic objectives what will happen if the deficit increases?
If deficit goes up
Exchange rate weakens
Causing imports to become expensive
