Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Topic 4 - Macro > 4.1.7 Balance of Payments > Flashcards

4.1.7 Balance of Payments Flashcards

1
Q

The current account of a nation’s balance of payments is made up of 4 separate balances
What are they

A
  1. Net balance of trade in goods
  2. Net balance of trade in services
  3. Net Primary income
  4. Net Secondary Income
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What is included in the trade balance in goods

A

Manufactured goods/Components/raw materials

Energy products/Capital Technology

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What is included in the trade balance of services

A

Banking, Insurance, Consultancy

Tourism, transport, logistics

Shipping, Education, Health

Research, Arts

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What is included in the Net Primary Income

A

Profits, interest and dividends from investments in other countries

Net remittance flows from migrant workers and working overseas

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What is included in Net Secondary Income

A

Overseas aid/debt relief transfers

Military grants

UK payments to EU (prior to Brexit lol)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

The Capital account of the balance of payments is a small element or it

What are the main items included

A
  • Sale/transfer of patents, copyrights, franchises (or internationally buying/selling land)
  • Debt cancellations (counted as a negative)
  • Capital transfers of ownership of fixed assets
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What is the Financial Account

A

includes transactions that result in a change of ownership of financial assets and liabilities between UK residents and non-residents

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What does the financial account include

A
  • Net balance of FDI flows
  • Net balance of portfolio investment flows (assets that is purchased in the expectation that it will earn a return or grow in value)
  • Balances of banking flows (hot money)
  • Changes to values of reserves of gold + foreign currency
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What is Foreign direct investment

A

is investment from one country into another

Could involve establishing operations/acquiring tangible assets/stakes in other businesses

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Explain a portfolio investment flow

A

happens when businesses from one country buy shares or other securities such as bonds in other nations

A UK investor buys some shares in Google - this is a portfolio investment outflow for the UK accounts

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What was the current account deficit as of 2018

What was this as a % of GDP

A

£82 Billion

3.9% of GDP

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What is a current account deficit

How would a country with a deficit achieve balance on their external accounts

A

It involves a net outflow from the economy’s circular flow

Deficit countries need to run a financial account surplus to achieve balance on their external payments

They are debtor countries

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Briefly list the reasons for a current account deficit

A
  1. Poor price and non-price competitiveness
  2. Strong exchange rate affecting demand for exports and imports
  3. Reccession in one or more or major trade partner country
  4. Volatile global prices
  5. Strong domestic economic growth
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Explain how poor price and non-price competitiveness can lead to a current account deficit

A
  • Higher inflation than trading partners over an extended period of time
  • Low levels of capital investment and research and development spending
  • Weakness in design, branding and product performance
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Explain how a strong exchange rate affecting demand for imports can cause a current account deficit

A

A high currency value increases the overseas prices of export - fall in demand

Appreciating currency also makes imports cheaper - increased import demand

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Explain why a recession in one or more major trading partners countries would lead to a current account deficit

A

recession cuts value of exports to these countries

17
Q

Explain why volatile global prices can lead to a current account deficit

A
  • Exporters of primary commodities might be hit by a fall in global prices and a therefore direct fall in the value of their expert earnings
  • Importing nations could be hit by higher would prices for oil/gas/raw materials
  • if demand for imports is price inelastic, then increased world prices will cause higher spending on imports
18
Q

Explain why a strong domestic economic growth can also be a cause of a widening current account deficit

A
  • Rising demand for imported raw materials and component parts used by domestic industries
  • Increased demand for and spending on imported capital equipment/new technology
  • Rising demand for luxury imported goods (positive YED)
19
Q

Would could be some structural causes of a current account deficit

A
  1. Relatively low productivity/high unit labour costs
  2. Insufficient investment in capital which limits a nation’s export capacity
  3. Low levels of national savings
  4. Long term declines in real prices of a country’s major exports
20
Q

What could be 4 possible consequences for a current account deficit

A
  1. loss of aggregate demand if there is a trade deficit (M>X) causing weaker real GDP growth and might lead to reduced living standards/rising unemployment
  2. cause the currency to depreciate, leading to higher cost-push inflation and a deterioration in the terms of trade
  3. Some countries running current account deficits may borrow to achieve a financial account surplus but this increase in external debt carries risks if interest rates rise
  4. lead to a loss of investment, leading to capital flight and a possible currency/balance of payments crisis
21
Q

What is a current account surplus

A

means that there is a net injection of income into a country’s circular flow

These nations are creditor countries

22
Q

What are the main causes of a current account surplus

A
  • Large propensity to save and invest
  • Large gap between export/import values, when the net income balance and net transfers are small
  • Export surplus due to high world prices like oil/gas
  • Deficit on financial account - FDI coming from revenue from exports
  • Strong exchange rate as a result
23
Q

What are expenditure switching policies

A

Policies designed to change the relative prices of exports and imports

Like import tariff - cause consumers to switch to domestic consumers

24
Q

What are expenditure reducing policies

A

These are policies designed to lower real income and AD and thereby cut demand for imports

E.g. higher direct taxes, cuts in gov spending

25
Q

List 3 types of expenditure switching policies

A
  1. Depreciation of the exchnage rate
  2. Import tariffs
  3. Low rate of inflation (perhaps deflation)
26
Q

Explain depreciation of the exchange rate as an Expenditure switching policy

However, highlight a problem with it

A

Reduces relative price of exports and makes imports more expensive

However, risk of cost-push inflation - erodes competitive boost + fall in real income

27
Q

Explain import tariff, as an Expenditure switching policy

However, also explain the problems with it

A

Increases the price of imports and makes domestic output more price competitive

However, risk of retaliation from other countries

28
Q

Explain low rate of inflation, as an Expenditure switching policy

A

Keeps general price level under control and makes exports more competitive

However, risks from deflation as a way of achieving internal devaluation

29
Q

List 2 types of expenditure reducing policy

A
  1. Increase in income taxes
  2. Cuts in real level of government spending
30
Q

Explain increasing income taxes, as an expenditure reducing policy

However, explain the problems with this

A

reduces real disposable income causing falling demand for imports

however, cut in living standards and risk of damage to work incentives in labour market

31
Q

Explain cuts in real level of government spending, as a form of Expenditure reducing policy

However, explain the problems with this

A

Lowers aggregate demand, firms may look to export their spare capacity

However, damage to short term economic growth, risk that austerity hits investment

32
Q

What other methods could the Government use to increase price competitiveness and exports

A

Supply-side policies

These can increase output and reduce domestic price levels

Can lead to more innovation, making exports more desirable

33
Q

What is the J Curve Effect

A

shows the possible time lags between a falling currency and an improved trade balance

34
Q

Explain the shape of the J-Curve

A
  • In short term - currency depreciation may not improve current account BoP
  • This is because the price elasticities of demand for export/imports is likely to be inelastic in short term
  • Initially, quantity bought will remain steady in part because contracts for imported goods are already signed. Exporting businesses will take time to increase sales following price drop
  • Earings from selling more imports may not be equal to higher total spending on imports
  • Balance of trade hence will worsen
35
Q

What does the Marshall Lerner Condition state

A

that a depreciation/devaluation of the exchange rate will lead to a net improvement
in the trade balance provided that the sum of the price elasticity of demand for exports and imports > 1 (elastic)

36
Q

What are global trade imbalances

A

Imbalances refer to persistent current account surpluses for some countries contrasted with deficits in other nations

imbalances often tend to persist, because:

a) not every country operates a freely-floating exchange rate
b) there may be structural reasons why some countries run persistent trade deficits or surpluses.

37
Q

How could floating exchange rates be self correcting

A

It suggests that in a floating exchange, trade imbalances rate system will self-correct because if,
say, a country has a trade deficit, then demand for exports will be low which in turn causes reduced demand for the currency.

This leads to a depreciation of the currency, thus making exports more price competitive and stimulating demand for them.

38
Q

Why might a trade deficit be a problem

A
  • Run up large external debts and are reliant on foreign capital
  • May decide to switch towards using protectionist policies
  • Deficits can lead to a fall in relative living standards over time if economic growth slows down
39
Q

Why might trade surpluses be a problem

A
  • Are saving more than they spend, thereby depressing global economic demand and growth
  • May be adopting a policy to keep their currency deliberately under-valued
  • Might be under-consuming (thus affecting living standards) and allocating domestic scarce resources to exporting overseas rather than allowing higher levels of domestic consumer spending

Topic 4 - Macro (21 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions