2.1.4 Balance of Payments Flashcards
What is the balance of payments (BoP)
Records all financial transactions made between consumers, businesses and Governemnt in one contry with other nations
What is trade
Trade involves the buying and selling goods and
services with other countries
What are exports
The sale of goods and services to buyers in other countries leading to an inflow of currency to the UK
What are imports
The purchase of goods and services from abroad that leads to an outflow of currency from the UK
Why does the UK export goods and services?
To find a market for excess production that cant be sold at home
To sell products at higher prices
Why does the UK import goods and services?
Goods that are not available in the domestic market
Goods that are less expensive or better quality from abroad
Wider range of products
What impact do exports have on the UK economy?
Exports create income for UK firms and employment opportunities
Exports add to the circular flow of income
What impact do imports have on the UK economy?
Allows consumers to buy cheaper products
Allows firms to accquire raw products/commodities for production
What are positive entry classes as
Inflows of foregin currency
exports sold overseas cause money to come into a country
What is negative entry classed as
Outflows of foregin currency
Imported good/serivces cause money to leave the circular flow of income and spending
What are the three main account on the BoP
- Current account
- Capital account
- Financial account
What is the main measure of a contry’s external trade performance
Current account (of the BoP)
What does the current account menasure
the difference between money and credit going in and out of an economy
through exports, imports and imcome paid on assets both home and abroad
What is a current account deficit
means that more moeny is leaving than entering the country
There is a net outflow of income from the economy’s circular flow
Current account deficit nations are debtor countires
What is a current account surplus
means more money is entering the country than leaving
Current account surplus nations are creditor nations
What was the current account (BoP) for the UK in 2018
£-81644 million
Is the current account (BoP) just trade
No
it includes aspects like:
Net primary income and Net secondary income
The current account deficit was x% of GDP in 2018 compared to 3.3% in 2017
3.9%
What is included in the trade balance in goods
- Manufactured goods, components, raw materials, energy such as oil and gas
- Capital technology
What is included in the trade balance in service
- Banking, insurance, Consulatancy
- Tourism, Transport, Logistics
- Shipping, Education, Health, Research, Cultural Arts
This is usually a positive in the UK
What is included in Net Primary Income from Overseas Assets
- Flow of profits, intrests and dividends from investments in other contires
- Net remittance flows from migrant workers
What is included in Net Secondary Income
- Oversea aid/debt releif
- UK payment to the EU
True or False?
Overall the Uk imports a greater Value than it exports, meaning it runs a trade deficit
True
Negatives for a current account deficit
- Loss of aggregate demand which the causes a slower rate of real GDP growth and therefore reducing livng standards
- Loss of jobs in home-bases industires, may lead to a regional decline and strucutral unemployemt
- Can lead to a currency weakening (less demand for currency) and high inflations, so countries may run short of vital currency reserves
- Trade deficit might actually reflect lack of competitivness/ supply-side weaknesses
Causes of a current account deficit
- Poor price and non-price competitivness
- Strong exchage rate affecting exports and imports
- Recession in one or more major trade partner countires
- Volatile global prices
- Booming domestic economy
- Falling oil price reducing cost of imports
- Relatively high inflation in UK makes exports less competitive
- Redction in quality of UK exports decreases demand for them
Why would poor price and non-price competitvness lead to current account deficit
- Higher relative inflation than a trading partner
- Low levels of capital investment and research and development spending
- Weaknesses in design, branding, performance and low labour productivity
Why would strong exchange rate affecting exports and imports lead to current account deficit
- High currency value increases the price of exports, perhaps causing falling sales
- Appreciating currency also makes imports cheaper, substitute for home output (Thatchers closing of heavy industries)
Why would Recession in one ore more major trade partner countries lead to current account deficit
- Recession cuts the value of exported goods/services to these countries
- Businesses may find barriers to switching towards faster-growth nations
Why would Volatile global prices lead to current account deficit
- Exporters of primary commodities might be hit by a fall in global prices
- Commodity-importing nations could be hit by higher world prices for oil and gas
(commodity= raw material/primary agricultural product)
Why would a booming domestic economy lead to current account deficit
- Domestic producers need to import more material from abroad
- Households, especially with a high tnedancy to import, buying more imports due to having a higher imcome
Around x% of all output produced globally is exported
And China, US, Germany, France and Japan account for just under y% of all national trade
x= 25%
y = 40%
