Balance of payments Flashcards
what is the balance of payments?
This is a record of all financial transactions made between consumers, firms and the government from one country with other countries. It states how much is spent on imports, and what the value of exports is.
what are exports?
e goods and services sold to foreign countries, and are positive in the
balance of payments. This is because they are an inflow of money.
what are imports?
e goods and services bought from foreign countries, and they are negative on the balance of payments. They are an outflow of money
what is the balance of payments made up of?
the current account, the capital account and the official financing account
what is the current account?
comprises the balance of trade in goods and services plus net investment incomes from overseas assets and net transfers
what is a current account surplus?
means there is a net inflow of money into the circular flow of income. The UK has a surplus with services, but a deficit with goods.
what is a current account deficit?
This means the UK spends more on imports
from foreign countries, than they earn from exports to foreign countries.
what are the main causes of a current account deficit?
strong exchange rate; high currency value increases prices of exports in overseas markets, appreciating currency means imports cheaper, domestic consumers switch to cheaper imports
recession in one or more trading partners; recession cuts total value of exports to the country
current account imbalances and economic growth?
By selling more exports to foreign countries, the UK will have a greater inflow of money into the circular flow of income. This will increase AD and improve the rate of economic growth.
During periods of economic growth, when consumers have higher incomes and they can afford to consume more, there is a larger deficit on the current account.
current account and inflation?
If imported raw materials are expensive, there could be cost-push inflation in the UK, since firms face higher production costs.
Interconnectedness of economies:
International trade has meant countries have become more interdependent so a change in the economic condition of one country will affect another, since the quantity they import or export changes. In theory, all current balances should add up to zero as what one country exports another imports.
what 4 key ways have led to globalization?
● The proportion of output of an individual economy which is traded internationally is growing.
● Many more people (or companies) own assets in other countries such as shares, loans or businesses.
● There is increasing migration between countries
● More technology being shared on a faster basis.
what are economic policies to reduce trade deficit?
demand management: a tightening of fiscal and/or
monetary policy reduces real spending power of consumers and leads to lower spending on imports
currency adjustments: lower exchange rates reduces the foreign price of exports and makes imports more expensive
supply-side improvements: investment in human capital to boost productive capacity and competitiveness in high-value industries like engineering, medicine
protectionist measures: such as import quotas, tariffs or other non tariff barriers
what is competitiveness?
the ability to sell goods and services at competitive prices in a foreign country
