Balance of Payments Flashcards
What are the three components of the BoP
Current account
capital account
financial account
what does the current account involve
trade in goods and services, net primary and secondary income
what does the capital account involve
transfers of ownership of fixed assets and contracts
what does the financial account involve
FDI portfolio and banking flows, gold and foreign currency reserves, estimated errors
what are portfolio flows
debt and equity
What is the main rule for the BoP
money in all accounts must always equal zero
Where does 20% of UK trade go
USA
What is the main means to balance the account
selling debt
How can consumer spending cause deficit on the BoP
- If spending is high consumers and firms will buy more imports
- if demand for imports is inelastic they will remain high
How can external shocks cause deficit on the BoP
- cause raw materials price to rise so price of imports will rise
- economic downturn in a country that one country may be exporting to will worsen exports
- Imposition of trade barriers may worsen exports to certain countries
How can international competitiveness cause deficit on the BoP
- worse international competitiveness will reduce exports
- developed countries can’t compete with low costs of production and thus price in developing countries so their exports are less desirable
- Some countries exports are higher quality due to better tech
- rise in value of currency SPICED
- Inflation causes exports to fall as they are more expensive and imports to rise
What are the causes of a current account surplus
- low value of currency WIDEC
- High interest rates mean less spending on imports
- recession means that domestic producers will look to sell internationally and there will be reduction in domestic spending
How can supply side policies rectify a current account deficit
- Subsidies to decrease cost of production
- decrease corp taxes
- increase min wage
- deregulation to make businesses more efficient
- invest in R and D
–> If CA deficit as % of GDP is worse than growth rate then it is an issue
How can tight monetary policy rectify a current account deficit
If it is successful in being deflationary then may increase appeal of exports globally as they become cheaper
–> raising interest rates can make the pound stronger
How can protectionism help to rectify a current account deficit
- Impose tariffs to make imports more expensive or put a quota to reduce supply
–> Retaliation and WTO rules
How can exchange rate policy help to rectify a current account deficit
weaken the pound makes exports cheaper and increase demand worldwide.
–> ML condition, J curve
what are the three methods to weaken the pound
- increase money supply with QE
- sell domestic currency reserves
- reduce interest rates
What can be the global impacts of countries correcting imbalances on their current account
- supply side policies can lead to increase in world trade
- Protectionism can lead to trade wars
- one country increasing exports can effect other developing countries negatively
What are long term flows
FDI and portfolio investment that is very predictable
What are short term flows
Based on speculation and is firms trying to quickly make money through changes in the exchange rates
Why does the deficit not matter
- Partial autocorrection when there is a deficit currency weakness
- Financial account governments can just sell debt
why doe the deficit matter
- structural weakness if country is dependent on imports
- unbalanced economy
- unemployment
- financing the debt is only short term
What is fiscal drag
When the government freezes tax allowance thresholds but inflation and wage increases causes people to pay more tax
