4.1.7 Balance of Payments Flashcards
What is the Balance of Payments?
A record of all the financial transactions made between comsumers, firms and the government from one country to another country
What is the Current Account within the Balance of Payments?
A record of all the financial transactions between countries. The main transactions are trade in goods and services but also include income and current transfers
What are ‘income transfers’ (current account)?
Net earnings from foreign investment and include salaries, dividends and foreign investment
What is The Capital Account and The Financial Account within the Balance of Payments?
Transfers of fixed asses such as portfolio investment
What is a current account surplus?
When there is a net inflow of money into the circular flow of income
What is a current account deficit?
When there is a net outflow of money from the circular flow of income
What are the causes of a current account deficit?
- strong currency
- strong economic growth
- high levels of inflation
- recession abroad
What are the ways to reduce a current account deficit?
- devalue currency
- tighter monetary policy (to reduce consumption/investment)
- contractionary fiscal policy (to reduce consumption/investment)
- supply side policies (to increase competitiveness)
- protectionism
If a country has a severe trade imbalance, what does it imply?
That they are too reliant on other countries for its growth
What happens to a country with a severe surplus or deficit when a financial crisis emerges?
Global crisis emerges. Was seen in 2008 when the export market EU became weak and it seriously affected UK performance
