Balance of payments Flashcards

1
Q

current account d

A

the part of the balance of payments that primarily records trade in goods and services

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2
Q

capital account and financial account d

A

the part of the balance of payments that records capital flows in and out of the country

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3
Q

current account deficit d

A

when imports of goods and services exceed exports

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4
Q

current account surplus d

A

when exports of goods and service exceed imports

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5
Q

balance of trade in goods d

A

visible exports minus visible imports

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6
Q

balance of trade in services d

A

invisible exports minus invisible imports

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7
Q

net income flows d

A

the difference between inward and outward flows of interest, profits and dividends

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8
Q

why does the UK run a trade deficit

A

reduction in the size of our manufacturing sector

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9
Q

what are examples of net income flows

A

interest

profits and dividends on UK assets from abroad

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10
Q

net current transfers d

A

mainly government transfers to and from overseas organisations

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11
Q

what does the financial account consist of

A

Net FDI
net portfolio investment (shares)
other capital flows (‘hot money’)

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12
Q

what are short-term capital flows

A

period of time up to 1 year, speculating companies and wealthy individuals seeking quick profits (hot money)

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13
Q

what are long-term capital flows

A

longer than a year, direct investment and portfolio investment flows (UK firm buy foreign subsidiary, government loan for 10 years)

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14
Q

direct investment d

A

the acquisition of productive assets, for example, factories and offices

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15
Q

portfolio investment d

A

the acquisition of financial assets, for example, shares and financial derivatives

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16
Q

benefits of more international capital flows

A

growth of world trade
source of finance for firms (that would otherwise be unable to obtain finance)
FDI facilitates transfer of technology, information and best practice

17
Q

disadvantages of more international capital flows

A

difficulties in one sector of the financial system can affect the global financial system
FDI may lead to global dominance (of multinational firms)
‘hot money’ de-stabilises exchange rates

18
Q

how much employment does the financial services sector create in London

A

15 % of capital’s employment

19
Q

how much does the financial sector in London contribute to the economy

A

£75 billion

20
Q

what is the problem with running a deficit on the current account

A

suggests lack of competitiveness

exports are too expensive in overseas markets, while imports are relatively cheap

21
Q

expenditure-reducing policies d

A

policies used to correct current account imbalances by reducing consumer spending power

22
Q

expenditure-switching policies d

A

policies used to correct current account imbalances by encouraging consumers to buy domestically produced output rather than imports

23
Q

what expenditure-reducing policies can be used to balance the current account deficit

A

fiscal policy or monetary policy

24
Q

why are expenditure-reducing policies used

A

reduce the real spending power so people spend less on imports

25
are expenditure-reducing policies long term solutions
no, because of their negative impact on growth and unemployment
26
what expenditure-switching policies can be used to balance the current account deficit
``` direct controls (import controls) devaluation of currency ```
27
are direct controls on imports likely to be used to improve the deficit
no, because the WTO would intervene
28
direct controls d
controls on imports, such as tariffs and quotas
29
devaluation d
reducing the value of a currency in a fixed on semi-fixed exchange rate system
30
depreciation d
in relation to currencies, reducing the value of a currency in a free-floating exchange rate system
31
J-curve effect d
in the short-term, a devaluation or depreciation will lead to a deterioration of the current account before it starts to improve
32
explain J-curve effect
initially Marshall-Lerner condition not met due to difficulty of changing contracts, but eventually it's met and the current account improves
33
negative effects of a current account surplus
leads to domestic inflation because a surplus is an injection to the circular flow (multiplier)
34
policies to reduce a balance of payments surplus
reflation (fiscal or monetary) removing controls on imports revaluation (appreciation)
35
When was the last time the UK had a current account surplus
1998