2.1.4 Balance of payments Flashcards
What is a balance of payments
A record of all the countries financial dealing with the rest of the world over the course of a year
Includes the current account, the capital account and the financial account
What are the elements of the current account
-Balance of trade, Primary income and Secondary income
What is the Balance of trade
difference between the value of exports and imports (trade in goods and services)
What is Primary income
Income earned by domestic citizens who own assets overseas minibus income earned by foreign citizens who own assets in this country e.g profits dividend ect
What is secondary income
Money transfers between central governments and remittances e.g aid
What’s the difference between a current account deficit and a current account surplus
D- value of money leaving the country exceeds value entering the country
S- value of money entering exceeds value leaving
What does the UK’s current account look like
trade in goods deficit
trade in services surplus
primary and secondary income deficit
What is a capital account
Transactions in fixed assets, for example through migration assets move
What’s the financial account
Transactions of ownership of financial assets and liabilities
What does the financial account include
Direct investment (FDI flows)
Portfolio investment (equities and debt securities)
Financial derivatives
Reserve assets
How do countries fund current account deficits
Attract forgiven investors by TNCs
Selling assets to foreign buyers
Getting foreigners to invest in uk based firms
Borrowing from abroad (issuing bonds)
What are the Long run causes of CA deficits
Underinvestment (low productivity)
High inflation (low competitiveness)
Inadequate R+D
Low cost competition
What are the Short run causes of CA deficits
Economic boom (high imports)
Recession (damaged exports)
Overvalued exchange rate
What is the impact of trade on the macro objectives
-Is a component of AD so CA deficit would reduce GDP, growth and employment
-Whereas a surplus causes export led growth
What are the policies to correct a CA deficit
Exchange rate policy, Expenditure reduction policies, Protectionist policies, Supply side policies
What is exchange rate policy
weakens the currency value to increase international competitiveness but will increase inflationary pressures
What are expenditure reduction policies
reduce import demand by reducing spending but also reduces AD causing unemployment
What are protectionist policies
Tariffs and other trade restrictions increase the price of imports to reduce consumption of imports but may lead to possible retaliation
What are supply side policies
improve productivity in economy to increase competitiveness but may be costly and ineffective
Why may CA deficits not be as concerning as other objectives
a floating currency means imbalances will correct over time
deficit, depreciation, competitiveness, improved balance
What is the sun of the worlds trade balance and why
Zero because one countries exports are another’s imports, therefore the colonic conditions in one country may effect the other through trade
