Balance Of Payments Flashcards
BOP
A record of all the financial transactions taking place between the U.K. And any other country
3 sections:
Capital account
Financial account
Current account
The capital account
Minor component of BOP which includes capital transfers as well as purchases as well as well as purchases of some non financial assets
The financial account
Measures the flows of financial capital into and out of the country
Net foreign direct investment- the buying of productive assets located out located outside of the country of ownership(e.g. UK buying foreign business or setting up elsewhere is an outflow of FDI)
Net portfolio investment-the buying of financial assets located outside of the countries ownership- foreign investor buying U.K. Shares is an inflow of portfolio investment
Short term movements of capital- money which can be moved immediately between currencies to max its return (Hot money£
Current account
Trade in goods(value)
Trade in services (value)
Primary income- net investment incomes (investment income received from abroad minus investment income paid abroad)
Secondary income- transfers of money between countries (private transactions(income from workers set to families abroad)
Foreign aid,grants,gifts
Balance on current account
Factors determining exports
Foreign GDP
Productivity
Inflation
Policies to correct a deficit on the current account
Expenditure reducing policies- (reducing. Spending in the economy)deflationary policies
Higher tax
Higher interest rates
Lower government spending
Expenditure switching policies- a policy to encourage a switch away from imports to encourage a growth in exports
Devaluation
U.K. Exports are cheaper for other countries
Imports more expensive
However depends on the elasticity of demand for imports and exports
Protectionist policies
However countries that have their imports restricted are likely to retaliate with similar measures which means the country sells less exports and they’re current account worsens
If a tariff is being used it’s assumed the good is elastic but therefore has substitutes
Supply side
Marshall-Lerner condition
The requirement that devaluation will improve the current account balance only if the tidal price of elasticities for imports and exports is greater than 1
The J curve
The observation that after a devaluation the current account balance worsens initially before improving
For foreign customers export prices fall but this does not increase exports straight away, the increase will happen over time after the good has become elastic
Imports price increase but are normally price inelastic, therefore the value of import will increase before consumers switch away from the expensive good
The significance of current account surplus and deficit
Why it matters
Minor objective
A large deficit means a net outflow of money
A current account deficit may signal a weak export industry
If the exchange rate is fixed a deficit may persist
A current account deficit with a Floating ER would mean a fall in value of curen y increase exports and reduce the deficit
A persistent deficit on the current account not matched by a surplus in the capital and financial accounts will lead to a fall in the government’s currency reserves forcing the government to borrow
The significance of accounts deficits and surpluses
Should not matter
Asking as the deficit on one aspect of the BOP is matched by a surplus by another component then the deficit shouldn’t matter
If a government has plenty of foreign currency reserves or has plenty of lenders willing to supply if need be then the deficit should not matter
Imports are likely to rise with high econ growth so therefore a current account deficit may just be a result of high econ growth and people’s increased income
Even though a deficit may be large it will only be a problem if it is a large percentage of a countries GDP
The deficit may be short run
Deficit will be more important for
Less developed counties as they will find it harder to borrow finance to fund the debt
