Balance of payments Flashcards
Balance of payments
measures the inflows and outflows of money taking place in the UK as a result of transactions with other countries
Sections of balance of payments
- Capital account
- Financial account
- Current account
Financial account
measures flows of financial capital in and out of the country
What does the financial account consists of
- FDI
- Net portfolio investment
Current account
- trade in goods
- trade in services
- investment incomes (primary income)
- current transfers (secondary income)
Trade in goods&services
Import -> leakage -> decrease in current account
Export -> injection -> increase in current account
Investment income
when investors from the UK invest outside the UK and the money entered the UK so increases the current account
Current transfers
When money is transferred abroad without getting any goods or services back in exchange.
Remittance
money transferred back home from relatives working abroad
Current account deficit
When more money is leaving a country that entering
What’s the UKs balance of payments
- current account deficit
- capital and financial surplus
What happened to Zambia CAD
In 2010, Zambia had a severe CAD which was balanced by the capital and financial surplus due FDI from China, now the Chinese own lots of Zambian assets so the rent and profits of theses assets go to china
Why does the UK want a current account equilibrium
by reducing the current account deficit, the capital and financial account surplus will be smaller and there will be less foreign investment so less future earning leaking out of the economy.
Factors that affect the current account
- exchange rates
- inflation
- costs
- quality
- income
How exchange rates affect the BoP
SPICEE
Pound appreciates > import expenditure increases and export revenue decreases > worsens UK current account
Appreciation in the pound = worsened deficit
How inflation affect the BoP
If one Greece has a lower inflation rate than Spain, consumers will buy from Greece because its cheaper, which will increase their export revenue and current account. Spains exports and current account will decrease.
How costs affect the BoP
If a country has lower production costs they will charge lower prices so low export prices which will increase demand for exports and export revenue, increasing the current account
How quality affect the BoP
Better quality goods > higher exports > higher export revenue > increase in current account
How income affect the BoP
When incomes increase, consumers will import more normal goods, so import expenditure will increase so money will economy, worsening the current account
Policies to reduce CAD
- expenditure reducing policy
- expenditure switching policy
- SSPs
How can expenditure reducing policies be used to reduce CAD
- contractionary monetary - to reduce AD - increase in interest rates/ reduction in MS
- contractionary fiscal - reduce AD - reduction in govt spending, increase in taxation.
Why might reducing AD to fix CAD be bad
- conflicts w/ macro objs
- increase unemployment
- might cause a recession
- if interest rates increase, consumers & business confidence might not fall
