Balance of payments Flashcards
current account d
the part of the balance of payments that primarily records trade in goods and services
capital account and financial account d
the part of the balance of payments that records capital flows in and out of the country
current account deficit d
when imports of goods and services exceed exports
current account surplus d
when exports of goods and service exceed imports
balance of trade in goods d
visible exports minus visible imports
balance of trade in services d
invisible exports minus invisible imports
net income flows d
the difference between inward and outward flows of interest, profits and dividends
why does the UK run a trade deficit
reduction in the size of our manufacturing sector
what are examples of net income flows
interest
profits and dividends on UK assets from abroad
net current transfers d
mainly government transfers to and from overseas organisations
what does the financial account consist of
Net FDI
net portfolio investment (shares)
other capital flows (‘hot money’)
what are short-term capital flows
period of time up to 1 year, speculating companies and wealthy individuals seeking quick profits (hot money)
what are long-term capital flows
longer than a year, direct investment and portfolio investment flows (UK firm buy foreign subsidiary, government loan for 10 years)
direct investment d
the acquisition of productive assets, for example, factories and offices
portfolio investment d
the acquisition of financial assets, for example, shares and financial derivatives
benefits of more international capital flows
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
disadvantages of more international capital flows
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
how much employment does the financial services sector create in London
15 % of capital’s employment
how much does the financial sector in London contribute to the economy
£75 billion
what is the problem with running a deficit on the current account
suggests lack of competitiveness
exports are too expensive in overseas markets, while imports are relatively cheap
expenditure-reducing policies d
policies used to correct current account imbalances by reducing consumer spending power
expenditure-switching policies d
policies used to correct current account imbalances by encouraging consumers to buy domestically produced output rather than imports
what expenditure-reducing policies can be used to balance the current account deficit
fiscal policy or monetary policy
why are expenditure-reducing policies used
reduce the real spending power so people spend less on imports