Balance of Payments A2 Flashcards
What is the Current Account of a nation’s balance of payments made up of
Net balance of trade in goods
Net balance of trade in services
Net primary income
Net secondary income
What is primary income
Profits interest dividends and wages
Examples of Secondary Income
Overseas aid
Debt relief transfers
Military grants
What does the financial account include
Transactions that result in a change of ownership of financial assets and liabilities including:
Net balance of FDI
Net balance of portfolio investment flows
Balance of banking flows
Changes to the value of reserves of gold and foreign currency
What is foreign direct investment
Investment from one country into another that involves establishing operations or acquiring tangible assets
What are portfolio investment flows
When people/businesses from one country buy shares or other securities such as bonds in other nations
Causes of a Current Account Deficit
Poor price and non-price competitiveness
Strong exchange rate affecting demand for exports and imports
Recession in one or more country’s major trade partner countries
Volatile global prices
Strong domestic economic growth
Supply-side / Structural causes of a current account deficit
Relatively low labour productivity / high unit labour costs
Insufficient investment in capital which limits a nation’s export capacity
Low levels of national saving
Long term declines in the real prices of a country’s major exports
Consequences from a current account deficit
A loss of AD due to a trade deficit leads to weaker real GDP growth
Big current account deficit in a floating currency system leads to depreciation in a currency
Increase debt due to increase borrowing
Capital flight
What is a current account surplus
Net injection of income into a country’s circular flow
What are the main causes of a current account surplus
Large and persistent savings over investment
Net trade surplus
Measures to reduce a country’s imbalance on the current account
Expenditure switching policies and Expenditure reducing policies
What are expenditure switching policies
Policies designed to change the relative prices of exports and imports
What are expenditure reducing policies
Policies designed to lower real incomes and AD and thereby cut the demand for imports
To what extent is a current account deficit corrected by changes in a country’s exchange rate
A large current account deficit leads to an outflow of currency from the circular flow which then causes an exchange rate depreciation within a floating currency system
A weaker currency in theory brings about an adjustment of the trade balance as exports become more competitive in overseas markets and imported goods and services appear more expensive in domestic markets
In reality - the extent to which a current depreciation helps to improve the trade balance depends on a number of factors
