BOP Flashcards
1
Q
define BOP
A
spreadsheet that measures inflows and outflows of money into and out of country by measuring international transactions
= made up on finical account, current account, capital account and net errors
2
Q
describe current account
A
- measures value of trade
- measures trade of goods and services= exports and imports that create the trade balance
- measures primary income= investments/ income into and out of country e.g. remittances, FDI
- measures secondary income of transfers e.g. EU fees, aid etc= money leaving country
- if imports greater than exports= negative trade balance= -ve.
3
Q
describe capital account
A
- measures debt forgiveness= high debt owed to country may be cancelled= -ve
- transfer of financial assets like bonds
- migrants entering or leaving country
- sales of tangible assets like factories, skyscrapers etc abroad
4
Q
describe financial account
A
- measures portfolio investment transactions
= buying and selling financial assets like bonds and shares
= if US firms bought UK gov bonds, it would increase inflow into UK gov= recorded as credit to UK= +ve - FDI flows e.g. foreign firms setting up in UK= increase credits to UK= +ve
- reserves held in currency or gold
5
Q
describe CA deficit
A
country buys more from rest of world than it sells to rest of world
= if more money leaves through international transactions than entering, unsustainable
= economy owes money to rest of world
= money tends to come from surpluses in financial account
6
Q
describe CA surplus
A
- high cash reserves in China can be used to invest into countries with C deficit like USA
= investments are safe and secure due to good rate of return from USA
= china may buy US gov bonds= increase credit to US financial account
= increase inflows= balance CA position
7
Q
why is a balanced CA a macro objective?
A
- means country can sustainably finance the CA
= important for LR growth - if it needs to attract sufficient capital inflows the pound would depreciate
= inflationary pressures on PL - imbalance would suggest UK is reliant on performance of other countries
= if export states like EU become weak, UK performance would be damages e.g. 2008 financial crash - difficult to finance deficit in LR
= USA’s CAD financed by Chinese investors buying US securities @ low IRs
= if china lose confidence in US economy they would stop buying US debt
= need to increase IRs to encourage investors to buy debt
= damage US consumers with debt as repayments would increase and disposable income would decrease
8
Q
factors that affect CA
A
- inflation
= leads to weaker currency due to lower purchasing power of currency= would force central bank to increase IRs to combat inflation
= would attract FDI and strengthen currency - high IRs make currency more attractive to investors
= appreciate currency - high economic growth would increase FDI= increase demand for currency= appreciate currency
- recession would decline currency value due to low investor confidence
- political instability would decrease confidence in currency
= value would decline - stable govt and clear economic policies would attract FDI and strengthen currency
- high gov debt would decrease attractiveness to a state’s currency
= investors would worry about country’s ability to repay debt
9
Q
causes of FDI in LEDCs
A
- LEDC may be abundant in natural resources which is useful for a firm’s production e.g. raw materials
- could have emerging or growing market that firms invest in
= high potential for growth and profit - lower cost of labour= exploit low COP
- low regulations and standards
= less restrictions on business operations
10
Q
adv of FDI
A
- injection into circular flow of income for LEDC
= more employment and LRAS= higher productive potential
= higher growth - fills savings gap due to injection of income and money
= can be used to invest= increase capital goods - increase credit to capital and financial account of BOP
= help decrease CA deficit - local firms forced to be more productive due to more competition
- higher potential for tech transfer
= MNCs may invest and spend money on R+D
= more and better innovation= advance state of tech - higher income and corporate tax revenue collection
= more job creation and profits made by firms
11
Q
disadv of FDI
A
- employment may be short term
= no guarantee that MNCs will maintain operations in LEDCs for long period of time - may not use domestic labour force and instead bring own trained and specialised workers
- MNCs may have too much power which they can use to exploit their position and role in country
= can use power to negotiate and influence policy making that serves their own interests and max selfish benefit
= regulatory capture - MNCs may favour capital intense production instead f labour force
= no benefits for local workforce
= low income and job opportunities - potential profit or revenue motive means foreign firms risk over-extraction of raw materials
= high risk of resource depletion as firms pay no regard to environmental impacts
= higher deforestation, reduce biodiversity and pollution etc
= cause negative externalities of production= reduce welfare - risk of low ethical and moral standards of MNCs due to profit motive and power
= Foxconn suicides in china
12
Q
EVAL of FDI
A
- uncertain value of multiplier as result of FDI
- depends on whether MNCs pay sufficient rate of tax if projects are profitable
= determines fiscal dividend” for host - FDI now more important than remittances
- strong FDI inflows could cause currency appreciation
= threatens price competitiveness of host country producers
= other exporters would be more price comp
= would crowd out local producers - does FDI promote diversification
= best way to overcome primary product dependency - does it increase capabilities and capacity for host country in LR
= if it does then adv outweigh disadvantages - depends on type of product and qual of jobs created
13
Q
policies to reduce CA deficit
A
expenditure reducing and switching policies
= decrease spending on imports and increase AD for exports
14
Q
adv of policies to reduce CA deficit
A
- contractionary monetary and fiscal policy to reduce AD
= decrease incomes= reduce marginal propensity to import - protections policies like tariffs and quotas
= reduce import expenditure
= increases AD for domestic goods instead so that money used to spend on imports can be spent on domestic goods - central bank can decrease IRs to increase hot money outflow= will sell currency as investors chase best IRs on savings etc
= more money leaving country= weakens exchange rate
= more expensive imports and cheaper exports
= decrease marginal propensity to consume imports
= higher revenue of exports= more balanced CA - SSPs increase LRAS= higher productive capacity of economy
= downward pressure on prices= reduce cost-push inflationary pressures= makes exports more comp
= increase AD for exports= reduce deficit
15
Q
disadv of policies to reduce CA deficit
A
- low AD decreases growth and increases unemployment
= conflict of macro objectives= risk of recession - inflation could fall below target due to less demand pull inflation in economy
- high risk of retaliation as a result of protectionism
= could worsen CAD as high tariffs on exports would increase their price= less competitive
= also risk inflationary pressures on consumers due to higher prices - tariffs etc may break WTO rules= result in fines
- is marshal Lerner condition applied?
= if sum PED of exports and PED of imports isn’t more than 1, weaker exchange rate wouldn’t improve deficit, instead would worsen it
= risk of J curve effect as CAD would worsen before it improves - SSPs are expensive with high OC to gov finances
- SSPs have long time lag before it makes change
- no guarantee SSPs will work
16
Q
EVAL of policies to reduce CA deficit
A
- depends on level of output gap= @ full employment and low AD would mean there’s no guarantee incomes would decrease
- depends on marginal propensity to import
= based on idea that low income reduced import demand
= no guarantee of consumer decisions and behaviour - SSPs depend on level of economic activity
- depends on size and % of GDP of deficit
= other macro objectives like inflation may be more important
17
Q
demand side causes of a CA surplus
A
- high incomes abroad due to boom in economies of major trading partners
= richer ppl abroad increase demand for exports - low domestic incomes= less sucking and demand/ expenditure of imports
- weak exchange rate makes imports more expensive and exports cheaper= high demand revenue of exports
18
Q
supply side causes of a CA surplus
A
- low relative inflation. compared other major trading partners
= makes exports more comp= increase demand and revenue of exports - low unit labour costs due to weak TUs and low min wage= decrease COP= exports are more price comp
- strong domestic investment in modern tech and capital
= decrease COP in LR= lower prices of exports=more comp - gains in comparative adv means firms can naturally specialise and produce specific good to export
19
Q
Consequences of CA surplus
A
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