4.1.7: Balance Of Payments Flashcards
What is balance of payments (BOP)?
A record of all transactions made between economic agents of one country and the rest of the world.
What are the components of the balance of payments?
-Current Account (2.1.4).
-Capital Account.
-Financial Account.
What is the current account split into?
-Trade in goods.
-Trade in services.
-Investment income.
-Current transfers.
What is the capital account split into?
RELATIVELY UNIMPORTANT
Records UK international money transfers of immigrants & emigrants.
What is the financial account split into?
-Foreign Direct Investment (FDI).
-Portfolio Investments.
-Other Investments.
What is foreign direct investment (FDI)?
The purchasing of part of a foreign firm (e.g. BT buying a 15% share in a Brazilian telecommunications company).
What is portfolio investment?
The purchasing of securities (such as bonds or shares) in other nations.
What is other investment?
Loans, purchasing of currency & bank deposits.
What are causes of a trade current account surplus?
-High productivity.
-Low inflation rate.
-Undervalued exchange rate.
-Possession of natural resources.
-Relocation of manufacturing to low wage countries.
-Protectionist policies.
What policies are used to reduce a trade current account deficit?
-Demand-Side Management.
-Supply-Side Initiatives.
-Protectionist Policies.
How does demand-side management reduce the trade current account deficit?
-Monetary & fiscal reduces AD.
-Quantitative easing reduces AD.
-There is high income elasticity for imports.
How does supply-side initiatives reduce the trade current account deficit?
-Industrial policy that aims to improve labour or infrastructure.
-Encourage industries to exploit opportunities in export markets abroad.
-Focus resources on industries where the UK has a comparative advantage.
How does protectionist policies reduce the trade current account deficit?
-Tariffs or quotes reduce the attractiveness of imports.
-Control inflation so British goods rise in price at a slower rate.
Evaluation for demand-side management reducing the trade current account deficit:
-Hyperinflation.
-Short term solutions that limit the economy’s output.
-Reduction in growth and living standards.
Evaluation for supply-side initiatives reducing the trade current account deficit:
-Politically unpopular.
-Short term job losses.
Evaluation for protectionist reducing the trade current account deficit:
-Trade wars (other countries also impose tariffs or quotas).
-Potential for deflation.
What can a trade imbalance suggest for the UK?
An imbalance suggests that the UK is reliant on the performance of other countries.
If export markets, (e.g. EU) become weak, UK economic performance will be affected.
This was seen during the 2008 financial crisis.
What can a surplus indicate for a country?
A surplus indicates low consumer spending and a low savings ratio. It also means consumers are enjoying fewer goods than they otherwise could, lowering living standards.
Why is a current account deficit a concern for the Eurozone?
The countries have a fixed exchange rate. This means they cannot devalue the currency to restore their level of international competitiveness.
