2.1.4 Bop Flashcards
What is balance of payments
Record of all financial dealings over a period of time between economic agents of one country and all other countries
What components is the balance of payments made up of and what do they do
Current account-records payments for the purchase and sale of goods and services
capital and financial account - records flows of money associated with saving, investment, speculation and currency stabilisation.
What parts is the current account split into and what do they do
Trade in goods - visibles because you can physically see them. They are goods that are traded. The difference between visible exports and visible imports is known as the balance of trade.
Trade in services - These are services traded in or out of the country, known as invisibles. A holiday to Spain by a British family is an invisible import as money leaves the UK and goes to Spain, whilst a Japanese firm buying insurance from a city of London firm is an invisible export as money enters the UK.
What are income and current transfers
Income:
• Wages, interest, profit, or dividends repatriated to the home country.
• Primary income: Earnings from factors of production abroad (e.g., interest, profits, dividends, and wages sent abroad).
Current Transfers:
• Money transfers between governments and overseas organizations (e.g., the EU).
• Secondary income: Government transfers to overseas entities.
Current account deficit and surpluses and balance
The current balance= Balance of trade + Balance of invisibles + Net income and current transfers.
A current account surplus= exports > imports, so the current balance is positive.
A current account deficit = imports > exports, so the current balance is negative.
Macroeconomic objectives
Low and stable inflation
Low unemployment
Economic Growth
Balance of payments equilibrium
How can achieving balance of payments equilibrium be affected by other objectives
High economic growth tends to mean that the current account becomes a deficit as there is increased imports due to increased demand. and it is during times of high unemployment, the current account deficit tends to improve. As demand decreases
Governments tend to want export led growth, which would cause economic growth, high employment and improve the current account balance; although it could lead to
inflation
How has interconnectedness of economies occurred
Migration
Technology sharing
Foreign ownership
International trade
change in the economic condition of one country will affect another, since the quantity they import or export changes.
