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3- Economics- Macro > Balance Of Payments > Flashcards

Balance Of Payments Flashcards

1
Q

Balance of payments

A

Records international financial transactions of all its residents
All financial transactions in and out of the country

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2
Q

Exports

A

Domestically produced g&s that are sold to residents of other countries

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3
Q

Imports

A

G&s produced in another country and sold to residents of this country

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4
Q

Current account

A

Records day to day international trade in g&s

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5
Q

What does current account include

A

Stig
Services trade
Transfers and secondary income
Investment income-primary income
Goods trade

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6
Q

Balance of trade in goods

A

Balance of visable trade
Export and import goods only

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7
Q

Balance of trade in goods equation

A

Export of goods-import of goods

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8
Q

Goods

A

Physical items aka visable
MOB
Manufactured goods- cars, tv
Oil
Basics- food and raw materials- gb imports most of its raw materials

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9
Q

Erratics

A

Large value items that can distort monthly figures
Sometimes are excluded from goods
Sometimes known as SHAPS
Ships, aircraft, precious stones

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10
Q

Credit

A

Positive number
Export from uk, bring foreign currency into uk

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11
Q

Debit

A

Negative number
Import involves currency flowing out of country

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12
Q

Deficit

A

Occurs when value of imports exceeds value of exports

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13
Q

Surplus

A

Occurs when value of exports exceed value of imporys

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14
Q

Trade gap

A

Balance of trade deficit
Uk has a deteriorating trade balance

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15
Q

Why does the uk have a deteriorating trade balance

A

-uk often can import goods more cheaply than ccan be produced in uk- deindustrialised
-poor productivity and supply side weakness
-high overvalued exchange rates- strong pound
-competition of no ecconomies eg china
-poor non price competitiveness

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16
Q

Deindustrialisatoin- Why does the uk have a deteriorating trade balance

A

Decline in uk manufcaturing sector
Many relocated production abroad where produced and labour costs lower
Uk has undergone structural economic change- increase tertiary sector
Still export some manufactured high value added items- cars, areospace, pharmaceuticals

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17
Q

Poor productivity and supply side weakness- Why does the uk have a deteriorating trade balance

A

High unit costs and lacking international price competitiveness
Skill shortage in many industries
Flexible labour markets- dicourage investment in training
Low level r&d
Lack new capital investment in equipment
Low levels vocational training uk
Low productivity in public sector

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18
Q

High overvalued currency- Why does the uk have a deteriorating trade balance

A

Means imports are cheap
Exports are dear- expensive
If consumers price sensitive - shift spending to foreign producers- eg result of brexit vote, depreciation, exports increase since june 2016

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19
Q

Competition of new econnomies eg. China-Why does the uk have a deteriorating trade balance

A

Reduced world price of manufactured goods
Harder uk producers to compete on price

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20
Q

Poor non-price competitiveness- Why does the uk have a deteriorating trade balance

A

Lack of innovation
Demand of some branded items such as iphones are price ineleastci- may limit innovation and restrict no of new desirable products on offer
Uk low level r and d- esp manufacturing

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21
Q

Balance of trade in services

A

Exports on servcies- improts on services

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22
Q

Service

A

Provision of something non-physical which yields a benefit- insurance, education, health
Main uk- financial,m education, entertainment (2nd to usa_
Many services are not internatiopnally tradeable- healthcare and restailing

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23
Q

Primary incom ebalnce

A

Foreign assets which generate an income
British citizens and firms may hold foreign shares which yield dividens
Foreign firms which yielf profuts
Vbritish banks which gain interest on forign loans

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24
Q

Income investment

A

Interest, profiut and dividens (ipd) or proterty income from abroad
Foreigners also own british assets, so investment income also flows out of the country

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25
Secondary income
Includes transfers
26
Transfers
money paid with no exchange of good, non trade items Eg. Oversees aid, wto payments, maintenance of troops and officers abroad
27
Current balance calculation
Current balance= trade balance+ servcies balance+ investment income balnace + transfer balance
28
Import of change on exports on ad
Ad= c +i+g+ (x-m) (X-m)- net export Affect ad curve Increase x then shift ad right
29
Affect on balance of payments if exports increase
Deficit decrease current account or even surplus
30
Balance of payments increase exports lr
Increase exprts, appreciation of currency, if demand exports elastic Demand for exports decrease and defict may increase or surplus not sustained -if inelastic demand for exports, appreciation not decrease demand significantly
31
Inflation impact of increase net exports sr
If increase demand exports, likely demand pulll inflation, esp if economy at natural rate of outpit But impact less inflationary if in negative output gap- dperession
32
Impact of increase in exports on inflation- lr
If demand pull inflation not under control, demand for exports decrease, in pricess If increased profits of exporters were invested int oexpanding productive capacity, the increased demand would not be inflationary
33
Growth of gdp impact of increase net exports
Increase ad, increase gdp, positive multoplier as exports are an injection to the circular flow of income
34
Growth in gdp impact of net exports increase- lr
If increased profits invested in increasing capacity, lras shift right, increased gdp may be sustained If increased demand for exports not under control- still likely return to natural rate of output
35
Equity impact of increased ne exports- sr
Increase exports, increase employment Increase tax revenue, gov spend more on merit goods such as eductaion and health that can imporve equity
36
Equity impact of increase exports= lr
As long as exports maintained, employment increase, quity shoutld improve in longer term Accelerating inflation would decrease equity
37
Full employment impact of increase net exports increase- sr
Increased demand for exports should lead to increase employment as exporters take on more workers
38
Full emplpoyemnt impact increase net exporters- lr
Provided inflation under control, exporters invest in expandng capacity, increased jos and nairu likely to decrease
39
Environmental quality impact of increase exports- sr
Increase exports of carbon intensive manufactured goods Increase export services minimal impact on envrionment Higher incomes may increase demand for carbon intensive and non-biodegradable consumer durables
40
Impact environmental quality- lr with increase exportst
Stronger exonomy mean increase co2 pollution, loss biodiversity ect Stronegr econ growth can mean greater investment in renewable energy for sustainable development
41
Tax and gov spending impact of increas exports= sr
Increaese profits, increase tax revenue Increase spending welfare and decrease gov borrowing Or increase spending on public services which may increase econ gorwth long term- education
42
Tax and gov spending impact of increase ecxports - lr
As long as not accelerating inflation and exporting firms invest increased profits into productive capacity, leading to substantial growth and employment Gov financing should improve lonnger term
43
Impacts on current account
Any event trend Increase uk productivuty Uk producers fail to keep up with changing consumer demands Uk higher inflation than other countries Recession benefiting Strong pound
44
Uk productivigy increase on current account
Decrease price expotrs, increase export revenue Unless foreign producers match improvements Unable uk citizens to swap improts for buying british
45
Uk producers fail to keep up with changing consumer demands- impact on current account
Exports decrease Current account deteriorate
46
Uk higher inflation than other countries-impact on current account
Decrease export revenue unless demand price ineleastic
47
Recession impact on ucrrent account
Uk spending with highe propensityu to import means imports decrease boosting current account
48
Strong pound impact on current account
Uk exports expensive, importsc cheap, worsen cuurent account Any exchange rate appreciation makes uk g&s less competitive and worsen current account Weak pound boosting export, increase cost import could still have negative impact current accoiunt
49
Structural balance of paments account
Current account Capital account Financial account Balancing item Changes to the value of gold and foreign currency
50
Capital account
Sale/transfer of transferable contracts eg patents Transfer of ownership eg fixed assets
51
Financial account
Inc transcations result in change of own financial assets and liabilities between uk residents Balance banking flows- hot money Net balance portfolio flows- inflows, outflows of debt Net balance of foreign direct investment flows (fpi)
52
Balancing item
Estimated errors and omissions
53
Does current account deficit matter- yes
-deficit may decrease competitivennbess- decrease productivity or lack of innovation Decrease employemnt, if gdp lower growth Imports a leakage from the curcular flow- leading to a negative output gap Continued deficit leading to increase foreign debt paid for the deficit Many argue that uk persistant structural defict due to lack of competitiveness in many sectors
54
Does the current account deficit matter- no
Little impact- should correct itself- deficit boom, recessiuon demands for imports falls Deficit linked with exchange rate ddepreciation, restore competitiveness Current account deficit funeed by foreigners willing to lend- uik financial sectyor short term hot money flow into banking sector financial deficiit If caused by umports capital equipmet- increase in exports in fiyture- eg. Nissan investemnt battery plant in ne= increase export long term
55
Overall does current account deficit matter
Not seirous in short run but indicates industrial decline, harmful long run Persistant deficit leads to decrease exchange rate depreciates, cost push inflation, decrease lr economic growth
56
Does a current account surplus matter -yes
Surplus is a net injection- boost to ad Positive output gap- demand pull inflation Lr supplu means lending to forign countries- too large not to repay eg. Trukeys current account deficit to germany Dome would say if persistant surplus missing out opportunities from forgeign g&s such as japan and s korea
57
Does a current account surplus matter- no
Shows counrteis industrial internationally competitive and earning income from foriegners Associated with high gdp and employment Many countries aim for export lead growth as a means of pushing towards ppb, positive multiplier and creating emploment
58
Overall does current account surplus matter
Short term spplyu quite favourable Little benefit long term surplus Living standards imporve by spending this income
59
What is the ideal current account
Equilibruum Where exports equal imports
60
Policies to decrease current account deficit
Supply side policies Monetary-+ exchange rate Fiscal
61
Supply side policies- decrease current account deficit
Aim to encourage econ to produce momre g&s at lower price level by using resources more efficiently Creating industries more competitive on international and domestic, increase export and decrease import
62
Examples of supply side policies to decrease current acocunt deficit
Competition polucy creates more competitive markets- deregulation, removing barriers to market Privitisation of national industries Breaking up of monopolies Decrease tax we;fare reform, increasing incentive to work save and invest Creation of more flexible labour markets- education and training indcentives r&d
63
Evaluation for supply side policies- decrease current account deficit
Take many years befor ethey benefit Decrease tax, inequality increase, undermine social cohesion Investment in education, training, infrastuecture expensive and may require higher tax revenues and increased gov borrowing Gov may be reluctant to increase tax, removing incentive, decreaseing ad Other countries may adopt supply sidde policies-compeitiveness of their own industries increase- may be diff to gain competitive advantage in international markets
64
Monetary policy
May be attempted in sr Interest rates increase Decrease ad for all g&s As uku in high propensity to import- decrease demand for imports
65
Evaluation of monetary policu- increase interest rates= decrease current account deficit
Increase interest rates Increase hot money flows, increase value of currency, decrease demand capacity (if demand price elastic) and decrease price imports
66
Monetary policy if interest rates decreased- decrease current account deficit
To decrease value of currency Proved effective after left erm Deficit decrease as strong global demand for cheap exports
67
Monetary policy if interest rates decreased- decrease current account deficit- evaluation
Recent years decrease interest rates and decrease exchange rates less effective in decreasing deficit- post credit crunch, due t oweak global demand- europe euro cirsis and covid Demand for many uk imports such as oil- price inelastic so increased cost deosnt decrease demand Weak currency not reduce deficit if uk is at natural rate of output- dangeer increase demand for exxports also increase as- lead to demand-pull inflationary pressures, and increase cost push inflationary pressures as increased cots of votal improrts
68
Exchange rate policy- decrease current account deficit
Linked to moentary policy Deliberately decrease exchange rate to boost exports may be considered a protectionist policy May result in retaliati8on from trading partenrs- net effect limiting international trade Dcerease econ activuty and gorwth, increase unemployment in most economies (great depression 1930s trade war)
69
Fiscal policy- decrease current account deficit
Changes to taxation gov spending and borrowing to influence ad Gov increase direct tax eg. Decrease disposible income, reduce demand all g&S- uk high propensity to imprt, decrease short term improvements
70
Fiscal policy- decrease current account deficit- evaluation
Increase direct taxes may decreease demand domestic g&s, damage incentive to work save and invest Undermine supply side economy longer term, risking danger of less competitive industries in the future
71
Fiscal policy- tarrifs- decrease current account deficit- evaluation
Protectionist and counter productive as can lead to retalliation, less econ activity, less international trade Members of eu cannot raise import tazes on own- eu as whole- now left- uk can
72
Example of retaliation over tarrifs
Trump increased tarrifs on imports of steel and other goods usch as solar panels Leading to retaliation from china and ey who increased tarrifs against us, resulting in job losses for exporters Overall more jobs lost than protected, cost us consumers on average $1,300/annum, hitting lower incomes more
73
Overall- decreasing current account deficit
No easy solution Short term- decrease interest rates- esp below natural rate of output and limited risk. Of demand- pull inflation Depends on level international demand Long term- supply side to create more competitive industry- sell more international and domestic markets But- takes long time to take efect Decrease quity from tax cuts Other countries also do supply side policies so diff to maintain compeyitiveness
74
Expendaityre reducing polciies
Aim to decrease demand imports spend less- increase income tax and increase inetrest rates But latter woudl appreciate currency making imports cheaper and exports more expensive makingd efiict worse
75
Expendaiture switching polciies
Protectionism Aim to reuce current account deficit

3- Economics- Macro (21 decks)

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