Balance of Payment Flashcards
WHat is the BOP?
records all financial transactions made between consumers, businesses and the government in one country with other nations
What are inflows of foreign currency counted as ?
positive entry
What are outflows of foreign currency counted as ?
negative entry
What is the main meausre of external trade performance?
current account of balance of payment
WHat are the three sections of the balance of payments?
- current account
- financial account
- capital account
What is in the current account?
trade in goods and services ,
investment income,
transfers
What is part of the trade balance in goods?
- finished manufactured goods, componants, raw materials, energy products, capital technology
What is part of the trade balance in services?
- banking, insurance, consultancy
- tourism, transport, logistics
- shipping, education, health
- research, cultural acts
WHat is the trade in goods?
- calculates the value of goods exported by the UK - value of goods imported
What is trade in services?
calculates the value of services exported by the UK - value of services imported
What is primary income?
flows of income from investments abroad - flows of income from foreign investments located in the UK
What is secondary income?
transfers of money recieved in the UK from abroad - transfers of money paid by the UK overseas
What does secondary income arise from?
- private transfers
- foreign aid
- grants
- gifts
WHy is the overall current account usually a deficit?
deficit on goods outweighs the surplus on services
What are the four current account deficit ?
- poor price and non price competitiveness
- strong exchange rate affecting exports + imports
- recesssion in one or more major trade partners
- volatile golbal commodity prices
What are some causes of a current account surplus?
- export orientated growth
- foreign direct investment
- undervalued exchange rate
- high domestic saving rates
- strong investment income from overseas investments
- protectionism
What are some problems of persistant trade deficit?
- loss of aggregate demand, causes slower real GDP growth and reduced living standards
- loss of jobs in home based industries, regional decline +unemployment
- deficit countries need to import financial capital to achieve balance
- currency weakness and higher inflation
- trade deficit may be a reflection of lack of competitiveness
What will a trade deficit mean for imports?
high
What are the problems with trade surplus?
if economy is operating ner full capacity, a rise in trade surplus can cause demand pull inflation
What are the problems with trade surplus?
if economy is operating ner full capacity, a rise in trade surplus can cause demand pull inflation
Where is the biggest source of imports and exports for the UK/
european union
reasons for a trade deficit in goods?
- sign of unbalanced economy (lower production of gas + oil)
- high income elasticity in demand, high propensity to consume
- weaknesses on supply - side of economy
- Uk businesses finding it hard to finance a rise in exports
- strong currency
Reasons fro trade surplus in services?
- Uk specialising in provision of services, Uk more competitive in provision of services
What are the three types of competitiveness?
- cost competitiveness
- non price competitiveness
- non-wage costs
What is cost competitiveness?
- difference in unit labour costs
What is non price competitiveness ?
- product design, quality, reliability and performance
What are non wage costs?
- cost of meeting health / environment regulations
- environmental taxes
- employment protection laws and health and safety laws
- requirements to provide pensions for employees
Reasons for UKs lack of competitiveness?
- low investment per capita in the UK (due to growing skill shortage)
- slow IT growth
- low level of investment in manufacturing (
- low savings ratio
What are the three policies to reduce trade deficit?
- demand management
- a lower exchange rate
- supply side improvements
How can demand management reduce trade deficit?
- tightening of fiscal/ monetary policy, reduces spending power of consumers and lower spending on imports (through cutting gov spending or raising income tax)
- leads to increase in spare capacity
How can a lower exchange rate reduce trade deficit?
- lower exhcange rate, increase competitiveness , lower price of exports, imports more expensive
How can supply side improvements be made to reduce trade deficit?
- policies to raise productivity, try to increase investment in industries
- policies to encourage business start ups
- investment in education and healthcare
- investment in modern critical infrastructure
Policy evaluation?
depends on how much spare capacity , how large output gap is
