Balance of Payments Flashcards
What is the financial account?
Measures the increases or decreases in international ownership assets that a country is associated with
What is the capital account?
Measures the capital expenditures and overall income of a country
What is Foreign Direct Investment (FDI)?
An investment made by a firm in one country into a firm in another country in order to gain control over the foreign firm (recorded in financial+capital account)
What are interest rates?
How much interest is paid by borrowers for the money that they borrow (controlled by the Bank of England)
How to calculate interest rates?
Amount of interest paid (specific time period)/money before interest x time period
What are hot money flows?
Money that investors move internationally between banks to maximise the interest or return that they receive
What are the components of the current account?
Trade in goods, trade in services, investment income, current transfers
What does the current account measure?
The inflows and outflows of money paid and received in exchange for this imports and exports
What is meant by current account equilibrium?
Where total inflows equal total outflows
If the current account is in deficit then…
the financial and capital account must be in surplus (vice versa)
6 factors that effect the current account?
exchange rates, relative inflation, productivity/costs, quality, growth, protectionism
What happens if the £ appreciates
SPICEE - strong pound:imports cheaper, exports (more) expensive (vice versa).
How will an appreciation and depreciation effect the current account?
An appreciation in the £ will increase import expenditure, decreasing exports revenue decreasing the current account (outflow>inflow), however, a depreciation in the £ will decrease import expenditure and increase export revenue increasing the current account (inflow>outflow)
What is inflation?
Shows us the percentage increase in the general price level
How does relative inflation effect the current account?
If country A’s inflation rate is higher than country B’s then consumers are more likely to buy exports as they’re relatively cheaper from country B increasing its export revenue increasing its current account. Demand for country A’s exports will decrease, decreasing their export revenue decreasing their current account
How does low productivity effect the current account?
Low productivity leads to high costs leading to a decrease in a country’s current account
How does high productivity effect the current account?
High productivity leads to low costs leading to an increase in a country’s current account
How does the quality of goods effect the current account?
A country which produces lower quality exports will sell fewer exports, which will cause export revenue to decrease, decreasing the current account (vice versa)
As a country’s income increases…
It will import fewer inferior goods and more normal goods
What is the difference between inferior and normal goods?
Inferior goods are those for which demand decreases as income increases. Normal goods are those for which, demand increases as income increases
How does growth effect the current account?
As consumers import more normal goods, import expenditure will increase , which means the current account will decrease or reduce or worsen (vice versa with inferior goods)
How does protectionism effect the current account?
Introduction of protectionist measures such as tariffs will increase the price of exports, causing consumers to switch from imports to domestic goods, decreasing import expenditure, increasing the current account
What are government bonds?
Government bonds, or treasury bills, are a method used by the government to borrow money. When a government issues government bonds, they sell a bond to an investor and then pay it back at a later date - with interest
Policies to reduce a current account a deficit:
Devaluation of an exchange rate, reducing domestic consumption and spending on imports, supply side policies to improve the competitiveness of domestic industry and exports
