Balance of Payments Flashcards
What are the balance of payments?
a record of all the flows of money between the residents of one country and the rest of the world
What are imports?
an overseas produced good/service purchased by UK citizens resulting in an outflow of income from the UK
What are exports?
a UK produced good/service sold overseas resulting in an inflow of income into the UK
What is the current account on the balance of payments?
the section of the balance of payments that records international trade in goods, services, primary income & secondary income
What is the balance of trade in goods and services?
the value of exports of goods & services minus the value of imports of goods and services. If this is positive, there is a trade surplus, if it is negative there is a trade deficit
What does the current account record the exports and imports of?
Trade in goods – oil, energy, raw materials, food, manufactures, semi-manufactures, components, capital goods etc.
Trade in services – finance, insurance, business services, consulting, travel/tourism, telecommunication and information etc.
Primary income(net investment income) – the inflow of interest, profits and dividends on UK assets held abroad, less the outflow of interest, profits and dividends of foreign-owned assets in the UK.
Secondary income – net current transfers between countries such as foreign aid, gifts, payments to and from EU (due as part of the TCA).
Current account balance: the value of exports less the value of imports for goods, services, primary and secondary income
What are impacts of running a current account deficit?
Suggests a lack of international competitiveness/supply-side weakness
Withdrawal from the circular flow (X<M) reducing AD, slows growth
Loss of jobs in home-based industries (regional & structural unemployment)
May cause a depreciation of the currency & some inflationary pressure
Foreigners may own more UK assets
More imports can add to the standard of living
Imports of capital goods can help boost development
What are cyclical causes of a current account deficit?
- Overvalued exchange rate
- Boom in domestic demand
- Recession in key export industries
- Slump in global prices of exports Increased demand for imported technology
- Increase in global energy/commodity prices (for net importers)
What are structural causes of a current account deficit?
Under-investment
Relatively low productivity
Persistently high relative inflation
Inadequate R&D, innovation
Emergence of low-cost competition (emerging markets)
Increase in global energy/commodity prices (for net exporter)
