Balance Of Payments Flashcards
What is it
Set of accounts that records the transactions that take place between uK residents and the rest of the world
What are the three major section
- transactions of goods and services (imports and exports)
- earnings of U.K. national employment overseas
- transfers of incomes, mostly between incomes
UK macro economic objective
Stable balance of payments on current account
Why is a stable balance of payments necessary for the U.K.
To ensure it earns sufficient foreign policy
A stable and balanced balance of payments over time is a sign of…
A healthy economy that is competitive and able to sell sufficient goods and services overseas to pay for its imports
Continued deficits on the current account of the balance of payments mean..
The UK earns less foreign current than it needs to finance its imports
How can a shortfall of foreign currency be covered
By the UK selling assets overseas, but this reduces future earnings of foreign currencies from these assets and will thus reduce income from abroad in the future
Why are continual surpluses on the current account of the balance of payments undesirable too
It indicates that the country is not using its reserves of foreign currency to enjoy fully the imports it can afford. Consequently welfare is unlikely to be maximised
If one country has a surplus in their balance of payments
Others must have a deficit; they are likely to try and reduce this deficit which could reduce the volume of international trade- damaging the economic welfare of citizens in all countries concerned.
In the third quarter of 2014 what was the U.Ks deficit
£27,010
In the third quarter of 2014 what was Germany’s surplus
£18,550
What are the three accounts
Current, capital and financial
Why is the UK current account of the balance of payments often featured in the media
It measures the extent to which a country is able to pay for the resources it requires from overseas
When does a current account deficit occur
When the outflows of currency on a country’s current account exceed the inflows over some period of time
Since when has the UK been in a deficit
2000, significantly worsening after 2011
What is a major cause of the deficit on the UKs current account
A dramatic decline in net investment or primary income (balance between income received by the U.K. from investment and income paid to foreign investors in the U.K.)
Example of the uk’s poor investment that resulted in deficit
Investment in the 19 eurozone countries where returns have been low, as these countries have performed very poorly over the last few years.
Internal factors that determine the balance of payments
Productivity (high export sales- boost trade balance & cost effective = consumers prefer domestic goods).
Macro economic performance (Keynes = high GDP = high imports) but also attracts FDI.
Exchange rate
How does a rise in the exchange rate affect a current account
Buyers need more of their domestic currency to purchase from the UK, sales fall worsening the current account
Germany current account surplus example
Surplus of 6% of GDP
High rates of productivity, with its rate of multi factor productivity rising 2% p/a
How a low exchange rate affects investment
Overseas investors require less of their domestic currency to invest in the U.K.- encouraging inward investment and improving the current account in the long term
How low inflation improves the current account
Low inflation increases competitiveness, also for domestic producers against imports
External factors affecting the current account
Low rates of inflation in other economies weakens the current account because they lose export sales and import penetration increases.
Other economies doing well= increase investment and consumption.
Foreign policies also affect - trade.
