Balance of Payment and Policy Conflicts Flashcards
What are the three sections in the balance of payments?
- current account
- capital account
- financial account
What is the current account?
concerned with flows of income from trade, the use of factors of production and other transfers between countries
What are the four parts of the current account?
- trade in goods
- trades in services
- primary income (net investment incomes)
- secondary income ( transfer of money between countries)
Explain the trade in goods?
- calculates value of goods exported by the UK minus the value of goods imported
- usually runs a deficit
Explain trade in services?
- calculates value of services exported by the UK - value of services imported
- typically runs a surplus
What are the major services exported by the UK?
in financial services industry (banking and insurance)
What is primary income?
flows of income from investments abroad minus flows of income from foreign investments located in the UK
Give examples of UK earnings abroad?
- dividends, interest earned abroad, profits and wages paid by UK-owned direct investments in businesses located abroad
What is the current status of the primary income for the UK?
moving into a deficit
Why has the UK got a deficit in primary income?
- rapid growth in investment in the UK by investors in China and india (creating flows of income back to those countries)
What is secondary income?
trasnfers of money recieved in the UK from abroad minus transfer of money paid by the UK overseas
What does secondary income arise from?
- private transfers
- foreign aid
- grants
- gifts
What status if the current account usually in?
a deficit
What factors determine exports for the UK?
- foreign GDP
- productivity
- inflation
- exchange rates
How does foreign GDP determine exports?
- as foreign GDP rises, spending in those countries will also rise, leading to greater demand for UK goods and services
How does productivity determine exports?
- if UK productivity rises relative to foreign productivity, Uk firms can produce more output for a proportionately smaller amount of inputs, decreasing cost per unit, making firms more competitive, boosting demand for UK goods
How does inflation effect exports?
- UK inflation is higher than foreign inflation, prices of UK goods rising faster then overseas. UK goods less price competitive and foreign buyers will switch to substitutes
Effect of exchange rates on exports?
- stronger pound will buy more foreign currency, but cause exports to fall as they are more expensive
What factors determine imports?
- UK GDP
- Exchange rates
How does UK GDP effect imports?
- as UK GDP rises, spending in the UK rises, amount of goods + services imported rises along with consumption
- higher volume of imports could deteriorate trade balance on current account
Effect of exchange rate on imports?
- strong pound buys more imports but less exports
What are the key macroeconomic objectives?
- sustainable economic growth
- price stability
- minimising unemployment
- stable balance of payments
When do negative output gaps occur?
when actual growth is below trend growth
What is a consequence of a negative output gap?
- cyclical unemployment is likely to increase (resources not employed, workers become unemployed
What is a positive output gap?
- actual growth is abobe trend growth
What is the problem with a positive output gap?
- eventually lead to rising prices, risk of inflation
When does a policy conflict exists?
when attempts to solce one economic problem lead away from solving another
Which policy objectives need increasing AD?
- Short run economic growth
- reducing cyclical unemployment
- eliminating a budget deficit
Which policies need a lower aggregate demand?
- reducing demand pull inflation
- improving current account balance
- eliminating a budget deficit
What are the common conflicts of policy?
- minimising unemployment and keeping inflation low and stable
- increasing economic growth and achieving balance on the current account
- reducing budget deficit through cutting gov spending and achieving economic growth
