Balance Of Payments Flashcards
Balance of payments
Records international financial transactions of all its residents
All financial transactions in and out of the country
Exports
Domestically produced g&s that are sold to residents of other countries
Imports
G&s produced in another country and sold to residents of this country
Current account
Records day to day international trade in g&s
What does current account include
Stig
Services trade
Transfers and secondary income
Investment income-primary income
Goods trade
Balance of trade in goods
Balance of visable trade
Export and import goods only
Balance of trade in goods equation
Export of goods-import of goods
Goods
Physical items aka visable
MOB
Manufactured goods- cars, tv
Oil
Basics- food and raw materials- gb imports most of its raw materials
Erratics
Large value items that can distort monthly figures
Sometimes are excluded from goods
Sometimes known as SHAPS
Ships, aircraft, precious stones
Credit
Positive number
Export from uk, bring foreign currency into uk
Debit
Negative number
Import involves currency flowing out of country
Deficit
Occurs when value of imports exceeds value of exports
Surplus
Occurs when value of exports exceed value of imporys
Trade gap
Balance of trade deficit
Uk has a deteriorating trade balance
Why does the uk have a deteriorating trade balance
-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
Deindustrialisatoin- Why does the uk have a deteriorating trade balance
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
Poor productivity and supply side weakness- Why does the uk have a deteriorating trade balance
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
High overvalued currency- Why does the uk have a deteriorating trade balance
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
Competition of new econnomies eg. China-Why does the uk have a deteriorating trade balance
Reduced world price of manufactured goods
Harder uk producers to compete on price
Poor non-price competitiveness- Why does the uk have a deteriorating trade balance
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
Balance of trade in services
Exports on servcies- improts on services
Service
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
Primary incom ebalnce
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
Income investment
Interest, profiut and dividens (ipd) or proterty income from abroad
Foreigners also own british assets, so investment income also flows out of the country
Secondary income
Includes transfers
Transfers
money paid with no exchange of good, non trade items
Eg. Oversees aid, wto payments, maintenance of troops and officers abroad
Current balance calculation
Current balance= trade balance+ servcies balance+ investment income balnace + transfer balance
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
Affect on balance of payments if exports increase
Deficit decrease current account or even surplus
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
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
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
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
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
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
Equity impact of increase exports= lr
As long as exports maintained, employment increase, quity shoutld improve in longer term
Accelerating inflation would decrease equity
Full employment impact of increase net exports increase- sr
Increased demand for exports should lead to increase employment as exporters take on more workers
Full emplpoyemnt impact increase net exporters- lr
Provided inflation under control, exporters invest in expandng capacity, increased jos and nairu likely to decrease
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
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
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
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
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
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
Uk producers fail to keep up with changing consumer demands- impact on current account
Exports decrease
Current account deteriorate
Uk higher inflation than other countries-impact on current account
Decrease export revenue unless demand price ineleastic
Recession impact on ucrrent account
Uk spending with highe propensityu to import means imports decrease boosting current account
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
Structural balance of paments account
Current account
Capital account
Financial account
Balancing item
Changes to the value of gold and foreign currency
Capital account
Sale/transfer of transferable contracts eg patents
Transfer of ownership eg fixed assets
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)
Balancing item
Estimated errors and omissions
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
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
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
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
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
Overall does current account surplus matter
Short term spplyu quite favourable
Little benefit long term surplus
Living standards imporve by spending this income
What is the ideal current account
Equilibruum
Where exports equal imports
Policies to decrease current account deficit
Supply side policies
Monetary-+ exchange rate
Fiscal
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
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
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
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
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
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
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
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)
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
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
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
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
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
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
Expendaiture switching polciies
Protectionism
Aim to reuce current account deficit
