Balance of payments Flashcards
Balance of payments
a record of all the financial transactions taking place between the UK and any other country
Components of balance of payments
Capital account , financial account , CURRENT ACCOUNT
Capital account
Has two components
- small component of BOP
- shows when ownership of assests have ben transferred accross borders
Financial account
measure of inflows and outflows within a country regarding financial capital.
Components of finanical account
- Net FDI
- Net portfolio investment
- hot money flows
Net FDI
Purchase and sale of productive assests internationally
Net portfolio investment
Purchase and sale of financial assests internationally e.g bonds , shares
Hot money flows
Refers to purchase and sale of currency where speculators aim to take advantage of exchange rate/ interest rate fluctuations
Current account
A measure of inflows and outflows regarding goods, services, factor of production and the other international trasnfers
What does the current account measure
Measures the earnings made by the use of assests rather than the assests themselves ( the assests themselves are in the capital account)
What are the components of the current account
- Trade in goods
- Trade in services
- Primary income
- Secondary income
Primary income
Net investment income - income from investing in other countries
Secondary income
Transfers of money between countries
- remittances
What is invisible vs visible
Invisible refers to services
Visible refers to goods
What is a balance of payments inbalance
An inblance can either be a surplus or a defecit.
Surplus of BOP
When net inflows are greater than net outflows e.g China
Defecit of BOP
When net outflows are greater then net inflows e.g the Uk
How to fix a defecit of BOP ( this will usually always relate to current account)
- Reduce imports
- Increase exports
How to reduce imports
- Decrease interest rates ( expansionary monetary policy) - this depreciates exchange rate , makes foreign goods less attractive to domestic markets as the domestic price of foreign goods is higher.
- Prtotectionist policies - focus on tarrifs , UK - Tabacco , Oil , Alcahol
- Reduce domestic unemployment ( domestic firms will increase production and therefor a higher proportion of somestic demand can be satisfied by domestic producers hence less imports will be required to satisfy the domestic population)
How to increase exports
1.
