Balance Of Payments Flashcards
What is the balance of payments?
A record of a country’s trade and transactions with the rest of the world.
What are the 3 sections of the BoP?
- The current account - largest component
- The financial account
- The capital account
What is surplus vs deficit?
When the sum of export goods, service and investment income and transfers is greater than imports.
A deficit is when sum of export goods… is less than imports.
What does the trade in goods measure? (1st component of the current account)
Trade in goods measures the net exports (X-M) of **visible goods **. e.g. clothing / electronics.
The UK traditionally runs a large DEFICIT on this component.
Why does the UK run a large deficit on the trade in goods component? (4)
- An increased demand for consumer goods - need to be imported.
- Decline in the UK manufacturing sector due to use of external parties.
- Lower production of primary materials - UK imports these instead.
- A strong currency which makes imports more affordable + exports less attractive.
What does the trade in services measure? (2nd component of the current account)
Trade in services measures the net exports of invisible goods e.g. banking, tourism, etc.
The UK traditions runs a large SURPLUS on this component.
Why does the UK run a large surplus on the trade in services component?
- A shift away from primary+secondary sectors and towards tertiary sector employment which focuses on services.
—> this makes the UK more competitive and can offer better services at lower cost.
What is investment income? (3rd component of the current account)
This is generated by UK-owned overseas assets.
The profits and dividends made abroad are then sent back to the UK, and are counted as a credit item of investment income.
—> it is included as money flowing into the UK.
On the contrary of investment income, what are debit items?
As foreign investments are made, debit items will also occur.
This means when foreign investors earn profits / dividends from their investments in the UK, those payments are sent to the foreign country.
—> accounted as money following out of the UK.
What are transfers? (4th component of the current account).
These are payments made or received by the government to or from other countries. UK typically runs a deficit on this section.
Main transfers include:
1. Payments made for membership of the EU (no longer applies for the UK due to BREXIT).
2. Foreign aid.
Why is there a persistent deficit on the current account as a whole?
- As consumer spending increases, so does demand for goods so there’s a HPC imported goods, increasing the deficit.
- The UK has become less competitive in the manufacture of goods - they are unable to compete with low-wage economies so the UK’s reliance on imported goods increases.
- The exchange rate may be too strong making exports less competitive and imports more attractive as they’re more affordable.
- There is an unbalanced economy as there is much more growth in tertiary sectors compared go primary/secondary.
How could the balance be redressed?
- Controlling consumer spending to reduce demand for imports.
- Investing in the supply side of the economy to improve productivity and increase exports through greater output.
- Depreciation of the exchange rate to make exports more competitive. However, makes imports more expensive which can be problematic due to high reliance on them.
- Improve overall macroeconomic conditions to encourage investment and domestic growth to reduce reliance on imports.
