Balance Of Payments Flashcards
Balance of payments
Record of financial dealings of econ agents in a period of time between 1 country & other countries
Balance of payment components
Current acc: record of payment for the purchase & sale of gs
Capital & financial acc: flow of money w S/I & speculation & currency stabilisation
Positive sign
Flow of money into country
Negative sign
Flow of money out of country
Current acc components
● Trade in gs (visibles)
● Trade in services (invisibles)
● primary & secondary income
Trade in gs
- trade in raw materials/semi manufacture & manufactured gs
- visible X gs: gs sold to foreigners (+ sign)
-visible M gs: gs bought domestically from foreigners (- sign)
- value of (X-M) = balance of trade
Trade in services
- invisible: transfer of income & payment receipts
- invisible X service = credit
Invisible M service = debit - inclu transports of services eg- shipping/air travel & tourism
Primary & secondary income
Primary income: loan of FofP abroad & inclu interest/profits/ dividend ls on assets abroad
-interest/profits/ dividends on assets owned by foreigners are paid out
Secondary incomr: range of gov transfers to & from overseas org eg EU
Policies to cure current account deficit
● expenditure switching
● expenditure reducing
● supply side
Expenditure switching policy (3)
● tariffs & quotas
- decrease attractiveness for M
》cause trade wars so worsens deficit
● controlling inflation attempts
- price of British gs increase slower than other countries so gs became more competitive
》decrease domestic gs D so lower unemployment … growth declines
● depreciation of £
- X cheaper & M dearer
》 countries have floating ex rate so central banks intervening impact ex for short time
(J curve eval)
Expenditure reducing policy (3)
● gov spending cuts
- decrease I in economy/low AD lvl … firms X spare capacity
》 damage ST econ growth … risk
that austerity hits I
● increase income/corp tax
- increase income tax … C have decrease disposable income to spend on M
- increase corp tax … less P revenue … less spending on Ming raw materials
》increase income tax … less incentive to work bc benefits more attractive
》increase corp tax … potential output decrease so les productivity & cost push inflation
● increase interest rates
- increase price of borrowing so C have less money for expenditure & P have less money to invest in productivity
》 decrease D … firms less output & cyclical unemployment
Current account balance
Value of (X-M)
Current account surplus
X>M
Current account deficit
X<M
