4.2.6 (4.2.6.2 ONLY) Flashcards
What is the balance of payments?
A record of all the currency flows into and out of a country in a particular time period
What are the three main accounts of the balance of payments?
The current account
The capital account
The financial account
What does the current account do?
Measures all the currency flows into and out of a country in payment for goods and services which are imported and exported
What does the financial account do?
Records capitals flows into and out of the economy
What are the 4 components of the current account?
The balance fo trade in goods
The balance of trade in services
Primary income flows
Secondary income flows
Why is the current account important?
Reflects and economy’s international competitiveness and the extent to which a country is living within its means
What is a current account deficit?
When the currency outflows in the current account exceed the currency inflows
What is a current account surplus?
When the currency inflows in the current account exceed the currency outflows
What are inward primary income flows?
Income flowing into the economy generated by UK-owned capital assets located overseas
What are outward primary income flows?
income flowing out of the economy generated by overseas-owned capital assets located in the UK
What are secondary income flows?
Current transfers flowing into or out of the UK economy
Examples of secondary income flows
Gifts of money
international aid
What does a positive balance on a section int he currency account mean?
A credit item (surplus)
What does a negative balance on a section int he currency account mean?
A debit item (deficit)
What is a balance in trade of goods?
The part of the current account which measures payments for exports and imports of goods
What are primary income flows?
Net income flows made up mostly of investment-income generated from profits, dividends and interest payments flowing between countries
What is FDI?
Investment in capital assets in a foreign country by a business with headquarters in another country
What is portfolio investment ?
The purchase of one countries securities by the residents or financial institutions of another country
What is short run export led growth?
economic growth resulting from an increase in exports which is one of the components of AD
What is long run export led growth?
Economic growth resulting from increased international competitiveness of exporting industries
Whatare the disadvantages of a BOP defcit?
- weakening of a currency - could lead to inflation
- domestic job losses - increase in unemployment
What is the justification for a current account deficit in a poor country?
The country needs to import capital goods to modernize infrastructure and promote economic development
However, the edification could become a means for financing the lifestyle of the wealthy
What is a disadvantage of a balance of payments surplus?
STAGNATION
Domestic inflation as cost of production increases
One countries surplus is another’s deficit which could lead to deficit countries having to impose import controls which cause all countries (even surplus) to suffer
Over-reliance on exports
What factors influence a country’s current account balance?
Productivity
Inflation
Exchange rate
How does inflation influence a country’s current account balance?
If a country’s inflation rate is higher than the rate of other competitor nations, exports will lose their price competitiveness so less demand for their exports
What are the types of policy used to cure or reduce a balance of payments deficit?
Expenditure-reducing policy
Expenditure-switching policy
What is an expenditure-reducing policy? and give an example
Government policy which aims to eliminate a current account deficit
By reducing the demand for imports by reducing the level of AD
Eg. Contractionary monetary/fiscal policy to create deflation and reduce AD
What is an expenditure-switching policy? and give examples
Government policy which aims to eliminate a current account deficit
By switching domestic demand away from imports to domestically produced goods
Eg. direct controls - tariffs
Devaluation - lowering the exchange rate
What is a disadvantages of an economy using devaluation to correct a deficit?
It could lead to retaliation devaluations which could harm trade and damage economies
Why would cost of production rise during a surplus?
The price of imported components for use in production will rise
What is stagnation?
A prolonged period of little or no growth due to high unemployment
Why mighty a country experience a current account surplus?
- Recession
- Weak currency
- High interest rates
Why mighty a country experience a current account deficit?
- economic growth
- elasticity of demand for imports
- strong currency
- external shocks
