Balance of Payment Flashcards
Balance of payment
The record of all financial transactions between one country and the rest of the world
Current account
The record of trade in goods and services, income flows and transfers between one country and the rest of the world
What is the current account made off?
Trade in goods, Trade in services, income flows and transfer
Trade in goods
Trade-in goods show the balance of earnings from exports and spending on imports of goods
Trade in services
Trade-in services shows the balance of earning from exports and spending on imports of services
Income flows
Earning on investments abroad
Transfers
Transfer of money or goods and services without any requirements of payment.
(For example : Giving aid)
Balance of payments on current account
The total of net trade in goods and services, income flows and transfers between one country and the rest of the world
Balance current account
Sum of exports plus the inflow of income and transfers is equal to the sum of imports plus the outflow of income and transfers
Current account deficit
The sum of exports plus the inflow of income and transfers is less than the sum of the imports plus the outflow of income and transfers
Current accounts surplus
The sum of exports plus the the inflow of income and transfers is greater than the sum of imports plus the outflow of income and transfer
Importance of a current account deficit
Country is consuming more than it is producing
Imports>Exports
Deficit :
- Reflect falling demand for domestic goods, lead to increased unemployment, less income tax revenue, government pay more benefits
- Due to factors that take a long time to change, productivity
- Increase debt for a country as extra spending is not being fully financed by the revenue from exports
However :
- Only a temporary deficit (importing more materials for production)
- Reduce inflation as total demand decrease so reduces pressure on prices
- Lead to fall in exchange rate, lead to international competitiveness
Importance of current account surplus
Economy is consuming less than its producing
Imports
Exports>Imports
Surplus :
- Reflect rising demand of domestic goods, leads to a decreased unemployment, more income tax revenue and government pay less benefits
- Decrease debt for a country as money flowing in is greater than spending
However :
- Cause a rise in inflation as there is an upwards pressure on prices due to the increasing total demand
- Lead to a rise in exchange rates and this can decrease international competitiveness of UK goods, eventually decrease exports
Causes / Reasons of surplus on balance of payments on the current account
- Strength of the economy, higher quantity of products of a high quality sold at low prices reflects what households and firms at home and overseas want to buy
- Lack of growth in the domestic economy, consumers within a country buy fewer imports while domestic firms find it difficult to sell at home so compete more to sell exports abroad
- A fall in exchange rate, increase the quantity of exports if consumers overseas are responsive to the lower export prices
- A net outflow of investment income, investment that foreign residents have made in a country earn less than the investments that country’s inhabitants have made in the other countries
Cause / Reason of deficit on the balance of payments on the current account
- Structural problems in the economy - overpriced goods, poor quality goods, goods no longer in demand
- Falling income overseas, lead to a fall in exports, rising income in a domestic economy leads to rising imports
- A rise in exchange rate, decrease the quantity of exports if consumers overseas are responsive to the higher export prices
- A net outflow of investment income, investments that foreign residents have made in a country ear more than the investments that country’s inhabitants have made in the other countries
