2.5 balance of payments Flashcards
what is the balance of payments
a set of accounts recording all financial transactions made between consumers, businesses, and the government in one country with others. tells us about how much is being spent by consumers and firms on imported goods and services, and how successful firms have been in exporting to other countries. inflows of foreign currency are counted as a positive entry. outflows of foreign currency are counted as a negative entry
why does the BoP balance
all money flowing out (debits) has to be paid for from somewhere. this must be from money flowing in (debits). when everything is added together it equals 0 i.e it balances
name the 3 accounts in the BoP
current account, financial account, capital account
whats the current account
a balance of 4 separate accounts.
1. balance of trade in goods (tangible)
2. balance of trade in services (intangible)
IMPORTS/EXPORTS
3. net primary income (interests, profits, dividends, migrant remittances (people working abroad sending some of their income back home))
4. net secondary income (contributions to EU, military aid, overseas aid)
COULD BE POS/NEG DEPENDING ON WHICH WAY THE MONEY GOES
explain the financial account
transactions in financial assets e.g the balance of foreign direct investment flows, the balance of portfolio flows (eg inflows and outflows of debt and equity), the balance of banking flows (eg hot money flowing in/out of banking system)
explain the capital account
transactions in capital e.g sale/transfer of patents, copyrights, franchises, leases and other transferable contacts, good will transfers of ownership of fixed assets
name the 4th part of the BoP
balancing item (estimated errors and omissions)
explain the policy objective of a ‘sustainable’ BoP position
if a country has a large deficit on the current account:
1. AD will probably be lowered. potentially lowers growth and increases unemployment. loss of competitiveness with other countries
2. increased debt burden - possible currency/financial crisis
3. downward pressure on exchange rates - possible stagflation (increasing costs to firms, higher import costs - cost push inflation - , reducing growth at the same time)
CURRENT ACCOUNT: reasons for changes/imbalances in trade in goods and services
higher incomes leading to high levels of consumption of foreign-produced goods, changes in the quality of goods, changes to competitiveness eg higher or lower labour/capital productivity, changes in the price of goods/higher or lower inflation rates eg increased wages = higher costs; increase in labour productivity = lower costs
CURRENT ACCOUNT: reasons for changes/imbalances in primary and secondary income
decline in repatriation of earnings of people working abroad perhaps due to changes to migration policy in the host country, global recession hitting the profits made by foreign firms owned or partly owned by UK investors
structural (supply side) causes of a current account deficit
under-investment, low productivity, persistently high relative inflation, emergence of lower cost competition
cyclical (demand side) causes of a current account deficit
over-valued exchange rate, boom in domestic demand, recession in key export markets, slump in global prices of exports, increased demand for imported technology
define a current account deficit
the value of imports is greater than that of exports
effects of a current account deficit
- leakage from circular flow - ad diminished
- may cause depreciation in exchange rate
- foreigners will owe more domestic assets
- sign of uncompetitive exports
- enables higher levels of consumption
evaluation points: effects of a current account deficit
- depends on how the deficit is financed - borrowing or capital flows
- depends on causes of deficit - high growth or uncompetitiveness
- depends on quantity of foreign assets
- can the country devalue currency?
