bop year 2 Flashcards
What does the financial account involve?
Foreign direct investment- Flows of money between countries where one firm buys or sets up business in another country
Portfolio investment- investment in financial assets such as shares in foreign companies.
Financial derivatives- contracts whose value is based on the value of an asset, for example, a foreign currency.
Reserve assets- foreign financial assets that are available to and controlled by monetary authorities such as the bank of England for financing or regulating payment imbalances.
Causes of deficits on the current account?
Economic growth- as consumers’ incomes grow, demand for imported goods increases, explained by the income elasticity of demand.
Inflation- high domestic inflation makes foreign goods more attractive for consumers.
International competitiveness- If domestic firms struggle to compete, the level of exports will fall relative to the volume of exports.
Causes of surpluses on the current account?
Natural resources- Where countries have large reserves of natural resources, they can run large current account surpluses.
Exchange rate manipulation- Where exchange rate is kept low, imports are more expensive and exports are cheaper.
High interest rates- cause more saving and less spending on foreign goods and services.
Measures used to reduce an imbalance in the current account?
Exchange rate changes- devaluation makes exports cheaper vice versa
Deflationary policies- higher interest rates will reduce consumer spending
Supply-side policies- long term approach that will increase labour productivity and reduce labour costs.
Why do countries aim for a balanced current account?
Large deficits can be a problem as they need to finance the increasing expenditure on imports, usually through loans abroad.
Large surpluses can be a problem as resources are focussed on producing to meet export demand rather than domestic demand. So, consumers choice and living standards could actually be low.
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mbalances may also lead to currency fluctuations, which can destabilise world trade.
In theory, you could expect a current account surplus (X-M) to boost employment because it is indicative of higher domestic demand.
High exports (X) leads to increased employment in the export sector.
Lower import spending may mean people are spending more on domestic goods rather than buying foreign goods. Greater demand for domestic goods helps domestic employment.
Current account balance
export revenue (inflows) – import expenditure (outflows) + net primary and secondary income
Current account deficit
where outflows exceed inflows to the current account
Current account surplus
where inflows exceed outflows to the current account
PEDx:
% change in quantity demanded of exports / % change in price of export
PEDm:
% change in quantity demanded of imports / % change in price of import
Causes for a current account deficit
* relatively low productivity
output per hour fall
less effceint
exports less price competitive
export revenue
depends on other countries the uk growth is currently slow compared to others
Causes for a current account deficit
relatively high value of the country’s currency
imports cheaper – demand increases
exports expensive
outflows up and inflows decrease
depnds on your ped the demand change is going to be less than porportiante due to an increase in price sop therefore a small effect
Causes for a current account deficit
* relatively high rate of inflation
the price levels in your country are rising so as a result people will look abroad for goods which are more realtively prices as a reults imports would increase. Furthermore you would also see less exports as your goods are more expensive
imports increase depends on elasticity
