Balance of payments Flashcards
What are the two main components of the current account and what does it measure?
this measures the trade in goods,
services, investment incomes and overseas aid and is made up visible trade (physical goods, raw materials etc…) and
invisible trade (the things you can’t see, e.g. tourism, financial services etc…). If there is a surplus here then that means the country is building up funds within the economy
which it can then spend and is an indicator of strength.
How does a surplus in the current account occur?
the need for foreign buyers to buy your currency to purchase your goods (i.e. you are exporting more than you are importing). Your currency strengthens as demand
for it increases and your reserves of foreign currency increases.
How does a deficit in the current account occur?
the need to sell your currency in order to
purchase foreign currency and buy goods from abroad (i.e. you are importing more than you are exporting). Demand
for your currency is reducing.
What does the capital account measure?
this measures capital and financial flows and investment – the movement of capital into (from foreign investment into the UK) or out of the country for investment (UK investors investing funds in abroad). Investment can be anything from property, shares, bonds etc…
How does a surplus and a deficit occur in the capital account?
Surplus = Investment from overseas investors into the UK is greater than overseas investment from UK investors.
Deficit = Opposite to the above.
How can a deficit in the current account be balanced?
Deficits in the current account must be made up from the capital account when considering the overall balance of payments. if there is still a deficit then reserves (foreign currencies) from the
Bank of England can be used.
What is a country’s balance of payments
Country’s transact ion record, measured by the balance of receipts and payments
Briefly describe what the current account measures
Measure of imports and exports of goods and services
What can be described as visible trade
Imports and exports of goods you can touch and feel’
What can be described as invisible trade
Imports and exports of services such as travel, tourism and financial services
Briefly describe fiscal policy
The use of government spending and taxation to influence economic activity/ levels
Briefly describe monetary policy
The use of interest rates and money supply to influence economic activity/ levels
Briefly describe M0
‘Nar row’ money, includes coins and notes in circulation and operational deposits with the Bank of England
Briefly describe M4
‘Broad’ money, includes coins and notes in circulation and the value of instant access accounts and term deposits held in UK banks/building societies by UK residents
Briefly describe quantitative easing
Injecting money into an economy when interest rates are very low, of ten done by buying back UK gilts. Puts more money in circulation and encourages spending
and more tax revenue.
