Balance of Payments Flashcards
Current account measures…
Balance of trade of goods and services
Net Primary incomes (interest, profit, dividends from foreign investment & remittances)
Net Secondary incomes (annual contributions to the EU and aid)
Factors affecting current account balance
High exchange rates
High consumer spending - more foreign demand
Weakening investment incomes (net primary income)
What is the difference between a deficit and a surplus?
A deficit is when currency outflows exceeds currency inflows in the current account (net withdrawal).
Whereas, a surplus is where currency inflows exceeds currency outflows in the current account (net injection).
Cyclical trade deficit
When a country’s trade balance falls during a period of economic growth, as high growth of imports if foreign demand is high.
Structural trade deficit
Occurs from supply-side weaknesses as FOP’s aren’t skilled enough to produced goods and services valuable to the international market (M>E)
Importance of trade to an international economy
Comparative advantage gives a nation the opportunity to specialise in what they’re best at producing
UK consumers have a better standard of living due to free trade - more choice.
World exports as a % of GDP increased from 13% to 30% from 1970 to 2022.
Structural causes of account deficit
Underinvestment - eg. inadequate R&D
Relatively low productivity
Relatively high inflation
Cyclical causes of account deficit
Overvalued exchange rate
Boom in demand for foreign goods and services.
Recession in key export markets
Problems with current account deficits
*Foreigners have greater claim on domestic assets - UK balance BOP buy selling assets from capital account
*Large deficit could be unsustainable if finance borrowed from abroad - exchange rate risk
*Depreciation in the exchange rate may lead to cost-push inflation
Capital account
Records ownership rights to a company eg. patents, copyrights, leases and other contracts
Financial account
Records transactions of financial assets & liabilities between UK and non UK residents.
eg. FDI flows, portfolio flows, & capital flows.
Consequences of investment flows
*Demand for labour
*Infrastructure improvements
*Tax revenue for the government
-exploitation of domestic workforce
- Pressure from MNCs to change legislation eg. to pollute more or lower minimum wage.
Expenditure switching policies
Policies to change the price of imports and exports eg. exchange rates and protectionism.
Aims to stimulate growth and reduce spare capacity.
Expenditure reducing policies
Policies to reduce real incomes and demand for imports eg. contractionary monetary, fiscal policy.
Aims to lower inflation.
Why is there a surplus in current account when there is a deficit in financial account?
Inflows into the financial account are spent on importing goods and services to maintain the value of a currency.
