Balance Of Payments Flashcards
What is the current account made up of
Trade in goods (balance of trade)
Trade in services
Net income –> incomes from profits, dividends and interest receipts from abroad minus profits, dividends and interests paid abroad
Net current transfers –> transfers of money without any reciprocal economic transaction e.g. Aid
What is the financial account made up of
Long term flows (FDI) –> inward investment (inflow), outward investment (outflow)
Capital movements –> portfolio investments e.g, UK pension fund buys shares in a US company (outflow)
Borrowing –> loans from foreign financial institutions and governments
Short term flows –> hot money, speculative buying of currency and other financial assets
Why does the BoP balance
If we have a deficit (net outflow of currency) we must find the currency to cover it —> government sells its foreign currency reserves
If we have a surplus (net inflow of currency) —> government will buy up the excess foreign currency and add it to reserves
What are the possible causes of a current account deficit
Low savings ratio —> high MPC on imports
High levels of investment —> capital goods imported from abroad
High levels of FDI —> outflow of repatriated profit
Change in comparative adv —> cheaper goods and services to be imported
Overvalued currency —> imports cheaper
Decline in non-price competitiveness
Protectionism
High rate of inflation compared to foreign competitors
Falling demand/recession in export countries
What reasons is there to be concerned about a current account deficit
Lack of competitiveness
Deficit drags on AD
High imports leads to loss of employment
Requires borrowing via financial account thus foreigners have future claim on UK assets
Deficits —> lack of confidence causing speculative flows
What reasons is there to not be concerned about a current account deficit
Deficit can be financed by inflows of long term flows (FDI) benefitting the economy
Deficit may be result of importing capital and intermediate goods which increase productive capacity
Reduces inflationary pressure
