4.1.7 - Balance of payments Flashcards
What are the components of the balance of payments
o the current account
o the capital and financial accounts
Define expenditure reducing policies
Policies designed to lower real incomes and aggregate demand and thereby cut demand for imports E.g. higher direct taxes or increased interest rates.
Define expenditure switching policies
policies designed to change the relative prices of exports and imports. For example - an exchange rate depreciation ought to improve the price competitiveness of exports and also make imports more expensive.
Define capital account
Formerly known as financial account, now a small section of the account which includes effects of debt forgiveness, sale/transfer of patents, copyrights, franchises, leases and other transferable contracts across
borders.
Define financial account
Transactions that result in a change of ownership of financial assets and liabilities between residents of different countries – includes net flows of money into equities, bonds, property.
Define secondary income
Net flow of overseas aid / debt relief, military grants and so on.
Define capital flows
Movements of capital between countries. Outward capital flows are movements of domestically owned capital abroad; inward capital flows are movement of foreign-owned capital to the domestic economy
advantages of international capital flows across the world
1) Capital flows facilitates growth in world trade.
2) Capital flows provide an additional source of finance for firms (especially important for firms in developing countries).
3) FDI can lead to the transfer of technology and skills.
three disadvantages of international capital flows for the world economy:
1) An interconnected global financial system carries stability risks.
2) Capital flows can potentially undermine national security.
3) Capital flows can lead to excessive borrowing.
Describe the financial account
split into three main parts:
- foreign direct investment (FDI), portfolio investment and other investments.
- Foreign direct investment is the flow of money to purchase part of a foreign
firm (10% of more of the ordinary shares) e.g. BT buying a 15% share in a
telecommunications company in Brazil. Portfolio investments are the same thing but where they buy less than 10% of the company. Other investments include loans, purchasing of currency and bank deposits.
causes of a current acc/ount deficit/surplus
1) Relative export competitiveness
2) Exchange rates
3) The state of the economy
What is relative competitiveness of exports determined by
inflation, productivity, innovation and protectionism.
demand causing a current account deficit
- if EG = rise in consumer spending & rise in Ms = deterioration of current account.
- this effects is even larger if YED of M is high bc then there is greater increase in imports following economics growth
Nature of uk consumer, app point
Research suggests that UK consumers have a high-income elasticity of demand for imports so the deficit tends to grow when the economy enjoys a period of consumption led growth.
International competitiveness as a cause of CAD
- Struggling to compete internationally:
+ Exchange rates = appreciation (strong exchange rate) means X’s more expensive = X’s fall and less competitive = deterioration of CA
+ Inflation = If UKinflationrises faster than our main competitors then it will make UK exports less competitive (pass on higher costs) and imports more competitive = deterioration in thecurrent account
EVAL:
This assumes that PED of imports/exports?
External shocks causing CAD
External shocks:
- Downturn in the countries that UK exports too = fall in X’s
- Trade barriers imposed = can reduce Xs made to a country.
- rise in world prices of imported materials e,g oil, timber, metals and demand fro these materials is relatively price inelastic, then a country will pay more for these imports at least in SR
Causes of a CAS, CAD
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