Balance Of Payments Flashcards
Describe bop
Measure county’s transactions with the rest of the world
Record money coming in and out of a country
Parts of bop
Current account
Capital account
Financial account
Describe current account
Record payments for trade in goods and services plus net flows of primary and secondary income
Define trade in goods
Buy and sell physical products trade in services
Transactions of non tangible items
Causes of current account deficit
Demand side
Strong domestic growth
Recession overseas
Strong pound= strong exchange rate
Causes of current account deficit
Supply side
Low investments
Low productivity
High unit labour costs
High relative inflation
Poor quality of goods
Consequences of current account deficit
AD shift to left
= real GDP lower
= high unemployment
= low GDP growth and weaker investments
Causes of current account surplus
Demand side
Strong domestic growth abroad
Recession in UK
Weak pound= weak exchange rate
Causes of current account surplus
Supply side
Low inflation in UK
Low labour costs
Strong investments in tech and capital in UK= low unit costs
Define net errors and omissions
Reflect imbalances resulting from imperfections in source data
= ensure accounts in a country’s BOP statement always sum to zero
Define primary income
Money received and earned from activities abroad
Interest, dividends and profits
Define secondary income
Transfers between countries
Contribution of EU, military aid overseas
what does the financial account measure
- portfolio investment transactions= buying and selling financial assets eg bonds, shares etc
- foreign direct investment flows
- reserves in currency or gold= type of investment to absorb imbalances or financing payments= easy to transfer
describe current account deficit
a measurement of a country’s trade where the value of the goods and services it imports exceeds the value of the products it exports
= more money leaving country than entering
= not sustainable in the LR= owe money to rest of world
how do countries fix current account deficit
uses surpluses from financial or capital accounts= balance the account and BOP
describe other uses of financial and capital account
to fox the current account deficit
how can a country current account surplus
- country will have excess cash= will sell more to the rest of the world= invest cash into a country with a current account deficit= will cause a financial asset deficit due to increase cost of outflow= balance BOP
- country will buy financial assets like gov bonds etc in other country w deficit= will know investment is safe and secure= give good rate of return
define current account
represents a country’s imports and exports of goods and services, payments made to foreign investors, and transfers
describe the roles of the current account
- measure trade in goods (imports and exports) and services= trade balance
- measure income flow leaving and entering
- measure transfers of gov eg EU fees, aid etc
causes of current account deficit
demand
- strong domestic growth= incomes are high= ppl willing to buy imports= increase money leaving= worsen CA deficit
- recession overseas= incomes abroad decrease= demand for imports decrease= decrease uk exports= decrease rev
- strong exchange rates= imports will be cheaper= expensive exports= decrease export revenue= increase money leaving uk
supply
- low investment, low productivity, increase inflation, increase unit labour costs= due to lack of competition of exports
- poor quality goods made, depletion of resources= cause exports to decrease= decrease export revenue
consequences of current account deficit
- decrease AD= decrease growth= increase unemployment
evaluate consequences of current account deficit
depends on the size of the deficit=
CA is an indicator of a good or bad economy
cause of supply side CA deficit more detrimental= increase negative effects
