Balance Of Payments Flashcards
What is balance of payments?
A set of accounts that monitors the transactions between the UK residents and the rest of the world.
The difference between credit and debit?
Credit is money flowing into the economy.
Debit is money flowing out of the economy.
All items have to be paid for so the balance will be zero.
What is the current account?
An account identifying transactions in goods and services between the residents of a country and the rest of the world.
It’s an indicator of international competitiveness.
4 components of the current account
- Balance of trade in goods.
- Balance of trade in services.
- investment incomes (net primary income) employment income earned abroad and sent home.
- net international transfers (net secondary income) international aid
Items included in the different components of the capital account.
- Goods: manufactured goods, exports and imports.
- Services: banking, finance, insurance.
- Investment incomes: profits, interests, dividends, remittance.
- net international transfers: overseas aid, military grants.
What is included in the capital account?
- Sales/transfer of patents, copyrights, leases and other contracts.
- Debt forgiveness/cancellation.
- relatively small account.
- main flow is migration- if someone moves to the UK they are now a resident and all their staff becomes the UKs assets.
What is the financial account?
An account identifying transactions in financial energy residents of a country and the rest of the world.
Components of the financial account?
- Net balance of FDI flows.
- net balance of portfolio investment.
- balance of banking flows.
- changes to the value of reserves of gold & foreign currency.
What is foreign direct investment?
It is investment from one country into another that involves establishing operations or acquiring tangible assets including stakes in another business.
Flows inward = positive for UK
Flows outward = negative for UK.
What is portfolio investment?
It happens when people/businesses from one country buy shares or other securities such as bonds in other nations.
Sovereign debt is total government debt issued in bonds in a reserve currency.
How to calculate the current account & what does the result show?
Total value of exports - total value of imports.
If X=M its balanced, if X>M its a deficit and if X
Causes of a current account deficit?
- poor price and non-price competitiveness.
- strong exchange rates
- higher economic growth in domestic economy.
Causes of a current account surplus
- persistent surplus of savings over investment - could help rebalance trade.
- large gap between X and M.
Balance of trade imbalances
It is the difference between the monetary value of exports and imports of output in an economy over a certain period. It is the relationship between any nations imported products and exported products.
Effect of a surplus
- persistent surpluses can lead to rising protectionist sentiment within trade deficit countries which in the long run threatens the process of globalisation.
Consequences of a current account deficit
- loss of AD due to a trade deficit which causes weaker real GDP growth and reduced living standards and increased unemployment.
- big current account deficits will cause currency to depreciate leading to cost push inflation.
- lack of competitiveness.
- may choose to borrow to achieve financial surplus.
- lack of investment.
What is the export multiplier effect?
A fall in exports will reduce AD and final impact on GDP, jobs and investment is amplified by multiplier effects.
Many industries rely heavily on key export industries remaining competitive these include:
*transportation/freight/logistics
*trade finance businesses
*service businesses that operate in ports and airports.
Policies to correct imbalances on the current account
- reduce AD
- weaken the pound
- investment in domestic production: make firms more competitive.
- protectionism
