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 as well as what the value of the export is
what are exports
goods and services bought from foreign countries – they are positive in the balance of payments – because they are an inflow of money
what are imports
are goods and services bought from foreign countries – they are negative on the balance of payments – they are an outflow of money
what’s the balance of payments made of
the current account
the capital account and the financial account
balancing item
what is the current account
this includes all economic transactions between countries – the main transactions are the trade in goods and services, income and current transfers
what is the capital account and financial account
capital transfers involve transfers of the ownership of fixed assets – the financial account involves investment – such as direct investment, portfolio investment and reserve assets being part of their financial account
what is the balancing item
the components of the balance of payments should balance – the sum of the accounts should be zero – where there are imbalances a balancing item is used to cover discrepancies
what is a current account surplus
- 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
The UK has a net current account deficit – means the UK spends more on imports from foreign countries than they earn from exports to foreign countries – if the deficit is large and runs for a long time, there could be financial difficulties with financing the deficit
causes of balance of payments disequilibrium (6)
appreciation of the currency
economic growth
more competition
deindustrialization
membership of a trade union
attractiveness to foreign investors
how can the appreciation of currency cause disequilibrium
a stronger currency means imports are cheaper but exports are more expensive – meaning the current account deficit would worsen
how can deindustrialization cause disequilibrium BOP
In the UK manufacturing sector has been declining since the 1970s – goods that the UK previously made domestically now have to be imported – worsens the deficit
how can increased competitiveness cause a disequilibrium of BOP
– if a country becomes more internationally competitive – such as with lower inflation or if there is economic growth in exporg markets – exports should increase – this also occurs when a country becomes more productive – since that causes the average cost to fall – this could cause the current account
how can economic growth cause disequilibrium of BOP
when consumer incomes increase - demand increases – this could increase demand for imports – this is especially true of a country such as the UK where consumers have a high propensity to import
how can being a member of a trade union cause disequilibrium of BOP
the UK has traditionally had negative current transfers – as fees are paid for membership of the EU
how can the attractiveness to foreign investors causes disequilibrium of BOP
a capital account surplus could be caused by incoming finance from investors buying UK bonds, securities and financial derivatives – this could help fund a current account deficit
what effects does a current account surplus have on financial and capital account
will cause a deficit on capital and financial account - vice versa
what happens if the UK exports more to foreign countries
- 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
how does economic growth effect the current account
- During periods of economic growth – when consumers have higher incomes – they can afford to consume more – larger deficit on the current account
what is FDI
FDI is the flow of capital from one country to another – in order to gain a lasting interest in an enterprise in the foreign country
benefit of FDI - unemployment
FDI can help create unemployment – encourages innovation of technology and help promote long term sustainable growth – provides LEDCs with funds to invest and develop
how is fiscal policy used to correct balance of payments
using change level of income tax
- If there is a deficit on the current account – income tax could be increased – this will reduce the amount of disposable income consumers have – reduces quantity of imports – however – may impact domestic growth – since consumers will also spend less on domestic goods
how is fiscal policy used to correct balance of payments
by changing gov spending
- Gov could also reduce their spending – reduces AD – leads to less imports – forces domestic firms into increasing exports – helps improve the disequilibrium
is fiscal policy more effective in short or long term and why
- Fiscal policy is effective in the short term – not so much in the long term – as soon as policy ends – households likely to revert their expenditure back on imports
expenditure reducing policies
Expenditure reducing policies aim to reduce demand in the economy – spending on imports fall
expenditure switching policies
Expenditure switching policies aim to switch consumer spending towards domestic goods and away from imports
the significance of of deficits and surplus for an individual economy (2)
- If imported raw materials are expensive – may be cost push inflation in the domestic economy – as firms face higher production costs
- International trade has meant countries have become interdependent – therefore economic conditions in one country affect another country – as quantity they import and export has changed
