Balance of Payments of Current Account / Exchange Rates Flashcards

1
Q

Definition of Current Account Deficit

A

Where Imports are greater than exports

• X

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2
Q

Definition of Current Account Surplus

A

Where Exports are greater than imports

• X > M

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3
Q

What are the components of the Current Account

A
  • Trade in Goods
  • Trade in Services
  • Investment Income
  • Transfers
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4
Q

Factors which cause a Current Account Deficit

A
  • Overvalued Exchange Rate (Appreciation) - if the currency is appreciating, imports will become cheaper and therefore there will be a higher quantity of imports.
  • Economic Growth - If there is an increase in AD and National Income increases, people will have more disposable income to consume goods.
  • Decline in Competitiveness - If there is hight inflation or a decline in productivity there will be less demand for UK exports.
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5
Q

How is a Current Account Deficit financed

A
  • Increase level of borrowing

* Net run down in savings

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6
Q

Demand Policies to reduce a Current Account Deficit

A

• Devaluation - this is lowering the value of the currency agains others, making exports cheaper and imports more expensive.
- However, this can lead to imported inflation

• Reduce Consumer spending - Govt. raises interest rates or increases taxes then people will have less money to spend.
- However this policy will conflict with the macroeconomic objectives with lower AD, growth is likely to fall causing unemployment.

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7
Q

Factors which influence the Exchange Rate

A
  • Relative Inflation Rates - If inflation in the UK is lower than elsewhere, then the UK exports will become more competitive - Appreciation.
  • Relative Interest Rates - If UK interest ratees rise relative to elsewhere it will become more attractive to deposit money in the UK, thus the demand for the sterling will rise. This is known as HOT MONEY FLOWS.
  • Speculation -
  • Strong Economy - If the UK economy is growing rapidly then interest rates are likely to rise to keep inflation low.
  • Current Account
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8
Q

Economic Effects of a Depreciation of the currency

A
  • Imports will become more expensive
  • Inflation as AD increases
  • Exports more competitive
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9
Q

Definition of a Depreciation

A

Where Exports are cheaper and Imports are more expensive

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10
Q

Definition of an Appreciation

A

Where Exports are more expensive and Imports are cheaper

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11
Q

Economic Effects of an Appreciation of the currency

A
  • Exports are more expensive
  • Imports are cheaper
  • A fall in AD, causing lower growth
  • Lower inflation
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