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[OBSELETE] S - Econ > balance of payments > Flashcards

balance of payments Flashcards

1
Q

what is the balance of payments?

A

measures the inflows and outflows of money into and out of a country

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2
Q

what does the current account consist of?

A

the trade in goods
trade in services
income
transfers

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3
Q

what does income measure as part of the current account?

A
  • measures flows of income entering or leaving the country
  • e.g when a uk worker works abroad, if they bring that income back to the UK → positive on the current account
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4
Q

current account doesnt measure volume but measures value. explain this

A
  • how much money is being spent on imports and how much money is being generated from export revenue
  • how much money is entering and leaving the country in terms of income
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5
Q

how do you work out whether you have a current account deficit or surplus?

A

add up all of the values for trade in goods and services, transfers and income to figure out whether you have a current account deficit or current account surplus
- if overall figure is negative→ deficit and vice versa

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6
Q

recall the demand side causes of current account deficit?

A

strong domestic growth
recession overseas
strong exchange rate

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7
Q

how does strong economic growth cause a current account deficit?

A
  • incomes are high
  • people are more willing to buy imports
  • people want to buy more things and these not be produced domestically
  • more money leaving country
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8
Q

how does a recession overseas cause a current account deficit?

A
  • incomes abroad are falling
  • demand for exports (demand from other countries) reduce
  • money generated from exports will reduce
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9
Q

how does a strong exchange rate cause a current account deficit?

A
  • imports are cheaper
  • exports more expensive
  • SPICED
  • strong pound makes imports cheap and exports dear(expensive)
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10
Q

recall the supply side causes of a current account deficit

A
  • poor quality of goods made/ reliability
  • depletion of resources
  • low investment
  • low productivity
  • high relative inflation
  • high unit labour costs
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11
Q

what factors cause a lack of competitiveness and why?

A
  • low investment
  • low productivity
  • high relative inflation
  • high unit labour costs
    • (first four bullet points) lack of competitiveness of domestic exports
    • makes a countries exports less competitive to other countries
    • foreigners would rather buy from other countries
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12
Q

why could supply side causes be more destructive than demand side?

A
  • supply side causes could be more destructive than demand side because they could be long term
  • supply side cant be changed quickly→ fixed in the short run
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13
Q

what are the effects of a current account deficit in terms of AD?

A
  • AD may fall as x-m is a part of AD
  • leads to reduction in growth
  • increase in unemployment
    • less demand for labour
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14
Q

how can you evaluate the effects of a current account deficit?

A

however this depends on the size of the deficit
- if the deficit as a % of GDP is small there would be little effect on AD
- also a current account deficit may be an indicator of a strong growing economy if caused by demand side
- depends on whether demand side or supply side causes the current account deficit
- assuming its going to be the trade parts of the account that causes the current account deficit
- may be due to income or transfers

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15
Q

what does the capital account account for?

A
  • small part of balance of payments
  • accounts for international transactions that are minor
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16
Q

what is counted in the capital account?

A
  • debt forgiveness
    • if a country owes lots of debt and the country that the money is owed to decide to forgive that debt
  • inheritance taxes that need to be paid internationally
  • international death duties
  • transfer of financial assets by migrants coming into/ out of a country
  • sales of tangible assets
    • if a company is selling factors of production abroad
  • sales of intangible assets (non produced)
    • e.d buying/selling of land internationally
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17
Q

what does the financial account measure/ consider?

A
  • looks at portfolio investment transactions
    • this is the buying and selling of financial assets
    • e.g bonds, shares, derivatives
      for example if a the US decided to buy a lot of government bonds from the UK that was be an inflow of money into the UK
      -also looks at foreign direct investment
      -also measures reserves held either in currency or held in gold
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18
Q

why is a current account deficit not sustainable in the long run?

A

if there is a current account deficit (when you buy from the rest of the world more than you sell to the rest of the world) this isnt sustainable in the long run and this money has to come from somewhere

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19
Q

how can a current account deficit balanced out using the financial account?

A
  • this money used to balance a CA deficit tends to come from surpluses in the financial account and/or the capital account
    • this balances the account
    • this works out because countries that have a current account surplus have a lot of excess cash→ selling more to the rest of the world than buying which can be used to invest in countries that have a current account deficit
      this leads to a surplus in the financial account for the country with a current account deficit and a financial account deficit for the country with a current account surplus
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20
Q

what is the net areas of admissions and how can it be used?

A
  • just in case a financial account and capital account cant balance out a current account deficit there is also the net areas of admissions part
    • this is where accountants get together and fill all the numbers to make sure the overall account balances
21
Q

how do countries often finance a CA deficit and how can this be used to evaluate financing a current account deficit?

A
  • countries that have a current account deficit often finance this by borrowing money
    • by issuing bonds/shares
  • this needs to be payed back
  • this may not be sustainable in the long run
22
Q

what is the significance/effects of global trade imbalances

A
  • international trade has meant countries have become interdependent → therefore the economic conditions in one country affect another as the quantity they export or import will change
  • a surplus of deficit on the current account could indicate an unbalanced economy → could mean that the country is too reliant on other countries for their own growth
  • could be difficult to attract sufficient financial flows to finance a current account deficit which could make it unsustainable in the long run
  • could become difficult to finance the deficit in the long run
  • countries may become reliant on the performance of other countries
  • if countries with a fixed exchange rate have a current account deficit they cant devalue their currency to restore their level of international competition
23
Q

what is meant be revaluation of a currency

A

this is when the currencys value is adjusted relative to a baseline such as the price of gold, another currency or wage rates

24
Q

what is meant by devaluation of a currency

A

this is when the value of a currency is officially lowered in a fixed exchange rate system

25
Q

recall the ways that the govt can intervene in the currency market to influence their currency

A

interest rates
quantitative easing
foreign currency transactions

26
Q

how can govt intervene in the currency market by using interest rates to influence their currency

A
  • an increase in interest rates relative to other countries → more attractive to invest funds in the country because the rate of return on investment is higher
  • this increases the demand for the currency → causing an appreciation
  • known as hot money
27
Q

how can govt intervene in the currency market by using quantitative easing to influence their currency

A
  • used by banks to stimulate the economy when standard monetary policy is no longer effective
  • this has inflationary effects as it increases the money supply so can reduce the value of the currency
  • usually used where inflation is low and not possible to lower interest rates further
28
Q

how can govt intervene in the currency market by using foreign currency transactions to influence their currency

A
  • BoE uses this to manage the UKs gold and foreign currency reserves
  • involves buying and selling foreign currency to manipulate domestic currency
29
Q

what are the consequences of devaluation/depreciation of a currency and ev

A
  • devalued currency makes exports cheaper and imports more expensive and could therefore inc economic growth + current account may improve
  • when firms know that the value of the currency is lower relative to another currency → allows them to plan investment as they know that they wont be affected by harsh fluctuations in the exchange rate
  • can be costly and difficult for the govt to hold large reserves of foreign currencies in order to maintain a devalued currency
  • depends on PED of exports and imports → inelastic exports wont increase significantly if the price falls
  • ## if the main trading partners are in a recession then the demand for exports is likely to be low → depreciating the exchange rate in unlikely to affect it
30
Q

how can you evaluate the consequences of devaluating/depreciating the pound

A

-could cause inflation due to higher costs imports + demand pull inflation
-the govt and central bank dont know better than the market where the currency should be
-the balance of payments wouldnt automatically adjust to economic shocks

31
Q

What are the benefits of investment flows

A

promotes growth of world trade
rising levels of income and employment
source of finance which is crucial for LEDCs
FDI facilitates transfer of technology - bring supply side improvements

32
Q

what are the disadvantages of investment flows

A

difficulty in one sector of the financial system can affect the global financial system e.g credit crunch
large scale of hot money flow of funds between currencies can destabilise exchange rates, current account and domestic currencies
FDI may lead to global dominance of MNCs leading to exploitation of workers and resources
long term deterioration in current account balance, inward investment straightens the financial account, however there is a longer term outflow associated with the payment of profits, interest and dividends on these investments

33
Q

what is the visible trade balance

A

includes the value of goods exported minus the value of goods imported, coverted into domestic currency

34
Q

what reasons are there for the UKs trade deficit in goods

A

persistent inflation which compares unfavourably to that of trading partners
supply side weaknesses such as low productivity
limited structural changes in the economy so that it no longer produces what the world markets want
deindustrialisation making increased imports of imported goods inevitable
quality of goods compared to other countries
recessions overseas
comparative advantage
protectionism in trading partners not replicated in the UK

35
Q

how can you evaluate the causes of a current deficit

A

the impact of the downturn in world trade -> cyclical causes
structural causes -> effects of globalisation and the supply side performances of the UKs manufacturing export businesses
external shocks such as volatility in commodity prices

36
Q

what is the UKs balance of trade in services

A

services are now more important in the UK
the UKs comparative advantage in financial insurance and ICT has lef to an overall balance of trade services surplus
also known as trade in invisibles

37
Q

recall the arguments for allowing a current account deficit

A

partial auto-correction (laissez-faire approach)
investment and the supply side
capital and financial inflows balance the books

38
Q

how is the partial auto-correction a reason for being relaxed about a CA deficit

A

with a floating exchange rate system, a deficit will lead to more of a currency being sold on foreign exchange marekts than is purchased
the currency will fall in value as a consequence, making exports more competitive and imports less so.
however many currency transactions are conducted for reasons other than trade such as investment or speculation - other factors also affect the exchange rate

39
Q

why may investment and the supply side be a reason for being relaxed about a CA deficit

A

CA deficit may be bad if its due to a surplus of imports over exports due to a lack of competitiveness of domestic firms and binge consumption from households at the expense of saving
however this may not be the case if the economy is growing quickly and attracting investment that may lead to higher imports of producer goods which will alllow exports to increase in the future

40
Q

how can you evaluate the idea of being relaxed about a current account deficit

A

structural weaknesses
an unbalanced economy - too much competition
loss of output and employment
potential problems in financing a CA deficit
downward pressure on the exchange rate

41
Q

what are the two categories of policy to cure the deficit

A

expenditure- reducing policies - purpose is to reduce consumer spending power
expenditure- switching polciies - purpose is to encourage domestic consumption instead of imports

42
Q

how do expenditure reducing policies work

A

if an economy has a high MPM, if they have less money to spend they will cut back on spending both internationally and domestically
deflation- contractionary polciies can be used

43
Q

why may contractionary policies not be used

A

unlikely to be used as a long term solution because of their negative impact on economic growth and unemployment
however when an economy is overheating, may be approporiate to use expenditure reducing measures

44
Q

how do expenditure switching policies work and give examples of some

A

occurs if the relative price of imports can be raised or if the relativeprice of UK exports can be lowered
examples:
direct controls - protectionism - however it doesnt cure the uncomeptitiveness of a countries goods and services
devaluation- reducing the value of a currency in a fixed or semi fixed exchange rate system
however the effectiveness of this is largely dependent on the price elasticities of demand for exports and imports

45
Q

what is the depreciation of a currency

A

if the currency operates in a free floating system and the value of the currency reduces you use the term depreciation

46
Q

what are deflationary policies

A

contractionary fiscal policy
tightening of monetary policy

47
Q

what are some policies to reduce balance of payment deficit

A

contractionary policies to reduce AD
subsidy to domestic producers
protectionist policies
devaluation of the exchange rate
supply side policies

48
Q

how to reduce a balance of payment surplus

A

expansionary policies
remove protectionist barriers
revaluation of the currency

[OBSELETE] S - Econ (42 decks)

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