Balance Of Payments Flashcards
What are balance of payments
The Balance of Payments (BoP) for a country is a record of all the financial transactions that occur between it and the rest of the world
What are the 2 main sections of the balance of payments
The BoP has two main sections:
The current account: all transactions related to goods/services along with payments related to the transfer of income
The financial & capital account: all transactions related to savings, investment and currency stabilisation
Why is it called balance of payments
It is called the BoP as the current account should balance with the capital/financial account and be equal to zero
If the current account balance is positive, then the capital/financial account balance is negative (and vice versa)
Money flowing into the country is recorded in the relevant account as a credit (+) and money flowing out as a debit (-)
What is current account
It records the net income that an economy gains from international transactions
Describe components of the current account balance
Goods are also referred to as visible exports/imports
Services are also referred to as invisible exports/imports
Net income consists of income transfers by citizens and corporations
Credits are received from UK citizens who are abroad and send remittances home
Debits are sent by foreigners working in the UK back to their countries
Current transfers are typically payments at government level between countries e.g. contributions to the World Bank
The Current Account balance is often expressed as a % of GDP
This allows for easy international comparisons
What is a current account deficit
A Current Account deficit occurs when the value of the outflows is greater than the value of the inflows
Usually occurs when the imports > exports
What is a current account surplus
A Current Account surplus occurs when the value of the inflows is greater than the value of the outflows
Usually occurs when imports < exports
What effects does a current account deficit have
If the Current Account is running a deficit, this has a negative impact on aggregate demand (AD)
Net exports are a component of AD
If net exports are negative then AD decreases
How could a current account deficit be corrected
To correct the current account deficit, the government could raise tariffs
This would likely decrease imports bought by households
Firms who rely on imports for raw materials used in production, would now face higher costs of production
These higher costs are likely to be passed on to consumers in the form of higher prices
Reducing the current account deficit has come at the expense of increased inflation in the economy - there has been a trade-off
