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balance of payments Flashcards

1
Q

what is balance of payments

A

a record of all financial dealings over a period of time between one country and all other countries

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2
Q

what 2 things is the BOP split into

A
  • the current account
  • the financial account
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3
Q

what is the current account

A

The money value of eXports - money value of iMports

(where payments for the purchase and sale of goods and services are recorded)

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4
Q

what is the financial acount

A

records the flow of capital (investment, loans, and other financial transactions) into and out of the country

where flows of money associated with saving, investment, speculation and a currency stabilisation are recorded

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5
Q

what makes the balance of payments balanced

A

sum of the
- current
- capital
- financial accounts
should equal zero

(total currency inflows into a country must equal the total currency outflows)

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6
Q

what is trade in goods (visibles)

A

specifically measures the payments associated with the exports and imports of

physical items or tangible products

between a country and the rest of the world

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7
Q

what is the balance of trade in goods

A

Exports - imports

the difference between the total value of a country’s exports of goods and the total value of its imports of goods

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8
Q

when is there a deficit/ -ve flow in BOP of trade in goods

A

if value of imports > value of exports

import exceed exports of goods

there is a deficit in the balance of trade in goods

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8
Q

when is there a surplus/ +ve flow in BOP of trade in goods

A

If value of exports > value imports (of goods)

(a country exports more than it imports)

there is a surplus in the balance of trade in goods

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9
Q

why is it referred to visible

A

because goods are tangible and can be seen

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10
Q

what is an example of a trade in goods

A

eg. UK importing cars from Germany

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11
Q

what is the trade in services

A

it measures the value of exports and imports of intangible (invisible) products or services between a country and the rest of the world

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12
Q

why is it apart of the balance of invisible trade

A

as services are not tangible and cannot be seen in the same way as goods

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13
Q

what is the balance of trade in services

A

is the difference between the total value of a country’s exports of services and the total value of its imports of services

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14
Q

difference between balance of trade in goods and in services

A

trade in goods measures (X-M) of goods

trade in services (X-M) of services

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15
Q

when does surplus of balance of trade in services occur

A

when the value of exports of services exceeds imports of services

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16
Q

when does deficit of balance in services occur

A

when the value of imports of services exceeds exports of services

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17
Q

example of blacance of trade in services

A

+ve eg. US tourists paying for hotel in UK

-ve eg. UK national holidaying in Spain

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18
Q

factors effecting imports/ exports

A
  • price
  • exchange rate
  • inflation
  • international competitiveness
  • protectionism
  • relationships between countries
  • quality, service, functionality, unique selling point
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19
Q

where is primary income from

A

interests, profits and dividends on assets owned abroad that is received into the UK

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20
Q

what is secondary income

A

mainly the gov transfers to and from overseas organizations eg. the EU

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21
Q

what makes the current account formula

A

(value of exports - value of imports) + net income + net transfers

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22
Q

current account surplus

A

exports > imports

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23
Q

current account deficit

A

exports < imports

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24
what is the transaction of the financial account
transactions that result in a change of ownership pf financial assets and liabilities between a country's residents and non residents
26
Example of flows of money on the financial account
- oversees company announces an inward investment project into the UK renewable energy industry - expectations of higher monetary policies
27
capital account effect on BOP
Very minor; can largely be ignored as it makes up a very small part of the BOP
28
What are the current and financial account main contributors (DSCFL)
Includes the effects of - debt forgiveness - sale/transfer of patents - copyrights - franchises - leases
29
Why does the balance of payments equal zero
Because of double entry book keeping system, where every transaction is recorded as both a credit (inflow) and a debit (outflow)
30
Why are imports current account debit (outflow)
Foreigners gain claims on domestic assets Imports represent money flowing out to pay for foreign goods and services
31
Why are exports current account credit (inflow)
domestic entries (companies, individuals..) gain claims on foreign assets earning foreign currency from the sale This is considered a credit to the current account because the country is receiving value from abroad
32
why are exports financial account debit
When a country exports goods, it usually receives foreign currency or assets in exchange when viewed from the financial account perspective, this transaction is recorded as a debit (outflow)
33
if a country exports cars what effect would it have on current account
Because it is selling goods to foreign buyers, who pay in foreign currency This is a positive inflow for the country, increasing its foreign currency reserves or assets which would mean a credit to the current account because the country is receiving value from abroad
34
Why are imports financial account credit
imports might result in an inflow of capital (if paid for by borrowing or drawing on foreign reserves) as this reflects an inflow of capital to finance the import This is a credit because the country is receiving funds from foreign sources, such as loans or credit, to finance the import
35
would a country’s imports of $1 million worth of cars be -current account credit/debit - financial account credit/debit
- Current Account Debit: The $1 million spent on the foreign cars is recorded as a debit because money flows out of the domestic economy to pay for foreign goods - The $1 million loan or capital inflow is recorded as a credit on the financial account because it reflects an inflow of foreign funds
36
net balance of zero
ensuring total value of inflows always equal to the total value of outflows
37
foreign direct investment
investment to acquire lasting interest in enterprises operating outside of the investor's economy
38
example of inward investment/foreign
Toyota building car plants in Derbyshire is an example of inward investment or foreign direct investment (FDI) from Japan to the UK Subsequent profits made by Toyota's UK factories flow out of the UK to the Japanese owners
39
example of overseas direct investment
BP investing in the construction of a new oil refinery in the US Gulf Coast region would be an example of overseas direct investment Profits generated by this refinery and returning to the UK in the future would be inward investment income
40
what is portfolio investment
involves the purchase of financial assets like shares and bonds
41
other investment
is investment that includes trade credit, loans, purchases of currency and bank deposit
42
6 main reasons for international capitol flow
- Seeking Potential Profit through Foreign Direct Investment - Pursuing Returns through Portfolio Investment, by purchasing shares and bonds issued by foreign companies or governments - Speculators may buy and sell assets, including currencies and commodities - Attraction of Higher Interest Rates for better returns on financial assets - Expectation of Currency Appreciation - Governments may issue bonds that are purchased by international investors to finance budget deficits
43
advantages of world capital flow
- enables investment Such as in industries that can access global markets, allowing them to benefit from economies of scale and longer production runs - Increases the Range of Goods and Potential Living Standards - financing the import of capital goods in dev. countries
44
disadvantages of world capital flow
- Increased Risk of Financial Instability and Crises - Potential for Asset Stripping and Short-Termism
45
global trade imbalances
they arise because one country's surplus is another country's deficit In essence, global trade imbalances reflect the interconnectedness of national economies through international trade and financial flows
46
2 parts of global trade inbalances
- imbalances of the balance of payments - imbalances in assets wielded abroad or borrowing abroad
47
why does current account deficit cause issues such as a trade imbalance
because it is a withdrawal from the circular flow of income causing AD to decrease because exports < imports leads to trade imbalances between countries and can cause -ve multiplier effect
48
How can current account deficit cause unemployment
Because of -ve multiplier effect and domestic demand falling jobs cutting and consumption decreasing, more benefits claimed
49
how can current account surplus cause inflation
due to the increase in aggregate demand which could cause inflation because AD shifts to the right more exports > imports
50
what can current account surplus lead too
- welfare loss; individuals have less of a choice - reduced consumption as more saving and reduced investment - retaliation and protectionism from other countries
51
effect of global trade imbalance
- small imbalance not a problem - large imbalance is potentially long term debt sustainability issues eg. If other countries are unwilling to lend/ invest
52
causes of change in the current account balance
- exchange rate function - economic growth rates - inflation levels -competitiveness and productivity - trade policies and tariffs
53
why does the government want a sustainable BOP / current account equilibrium
- (Main macro objective) for economic stability to prevent excessive borrowing, currency depreciation, financial crisis - sustainable growth - confidence in the economy - employment and production for economic explanation - currency stability to reduce excessive deficits
54
how being a net exporter effects AD
increases AD
55
how being a net importer affects AD
decreases AD
56
whether or not economies benefit or suffer of current account deficit/ surplus may depend on
- PED of imports and exports - currency/price changes - non price factors - gov/central bank intervention - main trading partners
57
trends in the UK current account over time
Balance of trade in goods has been -ve as visible exports - visible imports Balance of trade in services has been +ve as invisible credits have been greater than invisible debits Primary balance has usually been positive, investment income earned abroad is greater than investment paid to foreigners Primary balance fluctuates more than balance of trade in services has
58
Why is trump using tariffs for USA
for protectionism of USA own products current account deficit -ve trade imbalance which means USA imports > exports causing decreasing AD causing unemployment because of -ve multiplier effect as goods are being imported there is less labour capital employed in USA rather than other countries
59
why are economies interconnected
the proportion of output of an individual nation economy which is traded internationally is growing Over increasing ownership of physical and financial assets such as companies, shares and loans Technologies are being shared
60
How to calculate index value
New number/ base value x100
61
How to calculate economic growth rates
%change = new value-old value / old value x100
62
Long run Phillips curve conclusion
any attempt to push unemployment below its natural rate would cause accelerating inflation. With no long term job gains
63
7 government objectives
- sustainable fiscal position - high and sustainable economic growth - low unemployment - low inflation - sustainable current account equilibrium on the BoO - high and sustainable economic growth - income and wealth equality - environment objective
64
6 main macro objectives without environment (TIGERS)
Trade Inflatiron Growth Employment Redistribution of income Sustainable
65
when do macro objectives conflict particularly
Ashen the economy is in disequilibrium, it’s difficult to improver everything without worsening something
66
main 7 conflicts
- inflation is too high - growth is too low - unemployment is too high - current account on the BOP is deeply in the red - fiscal deficit is too high - inequalities in income and wealth are too great - environmental situation is deteriorating
67
Inflation is too high
Reducing AD reduced inflation eg. Cutting consumer and gov spending However could lead to recession and cyclical unemployment
68
growth is too low
raise AD However this will lower unemployment but increase inflation and can lead to a rise in exports
69
70
what is capital account in a country’s balance of payments
focuses on international flow of capital
71

macro economics (6 decks)

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