4.1 International Economics - BoP Flashcards
Define balance of payments
It is the record of all internationaltransactions between countries comprising of the current, financial and capital account.
What is the ratio of UK’s import with EU against Non-EU countries
50/50
What is the split between the UK’s exports with EU and Non-EU countries?
45/55 (non-EU majority)
What are the top 5 countries the UK imports from
China (microchips)
Germany (cars)
USA (food/cars)
Netherlands (flowers/lightbulbs)
Norway (fish)
What are the top 5 countries that the UK exports to?
USA
Netherlands
Germany
Irish Republic
China
What are the 4 components that make up the current account?
- trade balance in goods (visible)
- trade balance in services (invisible)
- net primary income from overseas
- net secondary income
Give examples of the components of current account
Trade balance in goods - technology, raw materials
Trade balance in services - education (uni), cultural arts (sports), financial services
Net primary income from overseas - interest/profits from investments overseas, net remittances from migrant workers
Net secondary income - overseas aid/debt relief, military grants (2% to NATO), UK payment to EU
Give examples of capital account
Sales/transfer of patents, copyrights, franchises, leases and other transferable assets
- debt forgiveness (uni loans past a certain age, debt cancellation (aiding other countries)
- capital transfer of ownership of fixed assests
Give examples of financial account
Include transactions that result in the change of ownership of financial assets and liabilities:
- net balance of FDI
- net balance of portfolio of investments
- balance of banking flows (hot money)
- changes in value of reserves of gold and foreign currency
Why are gold reserves important?
- gold holds value in case the currency breaks down
- used to buy imports if there is not enough funds
- counter economic shocks
Limitation of BoP
- hard to quantify all services (trade balance in services)
- informal economy
- live data (latest is 2022 Q3)
- impossible to reach equilibrium in reality
- FDI hot money is volatile
- time lag
Causes of the current account deficit
- Increase globalisation (more competition so less X sold)
- increasing protectionism (tariff on X)
- UK has lack of natural resources
- Brexit (economic shocks)
- UK persistent C.A deficit due to weak supply side policies
- expansionary fiscal policies + monetary policies
- High value of £ relative to other economies
- Economic cycle of trading partners
- Relative inflation (pushes price of X)
Consequences of a C.A deficit
- fall in growth
- currency depreciation
- may run out of gold and currency reserves
- lack of competitiveness
- weakness in supply side policies
List pros of current account deficit
- Fall in inflation
- sign that the economy is in a boom
- improvement in standards of living
Cons of a C.A deficit
- cyclical unemployment in X industry
- Fall in gold and currency reserves
- fall in international competitiveness
- lead to increased uncertainty so lost in investors then capital flight
List policies to improve the C.A deficit
- protectionism = subsidies for X, tariffs on M, quotas on M
- expenditure switching policy (design to increase demand of X and decrease demand of M by depreciation/devaluation)
- expenditure reduction policies (designed to reduce incomes via contractionary policies)
- Improved supply side policies (improving quality and quantity of FoP)
What does WTO stand for
World trading organisation
Difference between devaluation and depreciation
Devaluation - occurs in fixed E.R system like China
Depreciation - occurs in free floating E.R system like UK
Explain the evaluation of depreciation called the readjustment process
When value of £ decrease you’d expect X demand to increase and M demand to decrease
- However as X demand increases, demand for the currency increases, so currency begins to appreciate again resulting in the reverse effects.
Explain the evaluation of the benefits of a depreciation referring to our trading partners
Depreciation is only beneficial when our currency becomes weaker than our top trading X partners’ currency like USA, China, Germany.
What is UK current account deficit as of 24/01/2024
-5.2% of GDP
What are you allowed to do for AP
Make examples up hypothetical such as,
For example, if the UK£ depreciates by 20% compared against the USD…
What do you call an increase in the value of a currency in a fixed exchange rate system
Reevaluation
What factors causes a rise in currency
- speculative currency demand (trading)
- increased FDI
- Increased interest rates (FDI)
- surplus in the current account (X>M)
Evaluation of factors causing an increase in value of currency
State of the economy
Economic shocks
Readjustment process
Volatility
Macroeconomic stability
Define a fixed exchange rate system
An economy whose currency’s value is pegged against another, and it controlled by the Government/Central bank
Define a free floating exchange rate system
When a currency’s value is determined by the S/D and there is no Government/Central bank intervention
How much productivity did the 4 day week study find out
20% increase
How would you draw a diagram of quality or quantity of FoP improving
Classical LRAS diagram shifting outwards
Define exchange rates
It is the value of a currency relative to a basket of currencies from other economies. Either under the free floating E.R or fixed E.R
On a S/D graph, how would you draw a depreciation
Outward shift of supply
- excess supply due to speculation trader selling in fear of a recession where I.R would decrease
Inward shift of demand
Advantages of Fixed E.R system?
- makes international trade easier (stable currency for M and X)
- no longer engage in forward markets
- can control cost push inflation (when d of M is too high)
- less influence by external factors
- higher FDI
Disadvantages of Fixed E.R system
- loss of readjustment process (no longer automatic)
- higher reserves needed (many countries do not have)
- reduced sovereignty monetary policies (I.R)
- creates political tensions e.g USA vs China caused global fall in GDP
- may cause cost push inflation
- devaluation may be against WTO rules
Advantages of free floating system
- when there is a C.A deficit the readjustment process is available
- sovereignty to set monetary policies
- reduces need of large reserves
- less risk of currency being severely undervalued
- acts as an insulation for the economy
Disadvantage of Free floating E.R system
- volatile due to speculation
- a lower E.R may not correct a persistent deficit
- conflict in macroeconomic objectives
List some macroeconomic effects of a depreciation
- rise in AD+RNO
- improve C.A deficit
- rise in cyclical unemployment (high costs of M)
