Balance of Payments (Deficit+Surpluses+Influences) Flashcards
Define Balance of Payments
statement of all financial transactions between UK&ROW (current, capital, financial accounts)
Define Current account
statement transactions of balance of trade, net income from abroad and net current transfers
Define Balance of trade
major component of current account, measures net exports (exports value – imports value)
Define Trade deficit
sometimes called trade gap, import value > export value, = to –ve net export figure
Define trade surplus
import value < export value, = to +ve net export figure
Define exports
goods and services sold to foreign countries, +ve on balance of payments, inflow of money
Define imports
goods and services bought from foreign countries, -ve on balance of payments, outflow of money
UK has a ____ of services but a ____ of goods
UK has a surplus of services but a deficit of goods
UK has a current account deficit
Pro and con of current account deficit
increase living standards of citizens, but decrease in money supply
Pro and con of current account surplus
increase in money supply, decrease in living standards
Factors causing current account deficit
High rate of consumer spending on imports (during economic boom)
Decline in international competitiveness making countries exports less competitive
Overvalued exchange rates which makes exports relatively more expensive
Name three factors affecting the current account
Consumer spending, exchange rate, competitiveness
Explain how Economic growth/consumer spending affects the current account
A period of consumer led economic growth will cause a deterioration in the current account. Higher consumer spending will lead to higher spending on imports. A country with a low savings rate and high % of consumption will typically have a higher current account deficit.
Explain how the exchange rate affects the current account
A depreciation in the exchange rate makes the currency relatively more competitive. After a depreciation, exports will be more competitive and imports more expensive. This should improve the current account. However, it requires demand for exports and imports to be relatively price elastic. If demand is inelastic, then cheaper exports will only cause a small rise in demand. The actual value of exports can decrease.
Explain how the competitiveness of a country affects the current account
In the long term, the current account will be influenced by the relative competitiveness of their industrial production. If a country becomes uncompetitive then exports will decline relative to imports.
Components of current account
Visibles (trade in goods) e.g. raw materials
Invisibles (trade in services) e.g. tourism and travel
Overseas income e.g. abroad assets
Current transfers e.g. aid - transfers money to but no money back
Overall the balance of payments must balance e.g. a current account deficit must be matched by
an equivalent amount of foreign capital entering the UK or by borrowing form other countries
Positive and negative of current account deficit
Increase living standards of citizens
Decrease in the money supply - deflationary pressure
Positive and negative of current account surplus
Increase in money supply
Decrease in living standards - inflationary pressure
The circular flow of income
Firms - goods and services
Households - factors of production (labour land capital enterprise)
Incomes (wages, rent, interest)
Expenditure
savings — banks — investments
tax — government — gov spending
imports — foreign trade sector — exports
Economists maintain that there are three possible ways of measuring this flow with each way looking at a different part of the circular flow of income, what area the three ways
The output method (total amount of goods and services produced in one year)
The expenditure method (the total amount of domestic spending by consumers, firms, government and foreigners)
The income method (the total income earned by the factors of production involved in the production of goods and services in one year)
An economy is in equilibrium when
the rate of injections = the rate of withdrawals from the circular flow
A current account surplus
means there is a net inflow of money into the circular flow of income
During a recession, the current account deficit…
falls because consumer spending falls
During periods of economic growth…
consumers have higher incomes so consume more so deficit increases
The sum of all countries trade balances should be
zero since what one country exports will be imported by another country
International trade means countries have become
interdependent therefore the economic conditions in one country affect another since the quantity they export or import will change
If the EU faces an economic downturn then
demand for UK goods and services will fall as the EU is the UK’s main export market and consumers in the EU are less able to afford imports
Government target
Current account equilibrium
What influences balance of trade
exchange rate
SPICE
Sustained current account surplus pros and cons
China, Germany
Pros: saves money for future international investments
Cons: deficit in financial crisis, lower standards of living
Sustained current account deficit pros and cons
UK
Pros: higher standards of living
Cons: credit crunch from overseas investment if poorer countries like Argentina in 1980 - no credit given
