Chapter 13 Flashcards
Balance of payments
is a record of all the UK’s transactions with the rest of the world.
the current account, the financial account and the capital account.
The main focus for most governments is the current account as it gives them an indication of the
competitiveness of their economy in the global market place.
The current accounts 4 key areas
Trade in goods
Trade in services
Primary income – investment incomes that include profit, dividends and interest
Secondary income – transfer payments that include international aid
Issues with a current account deficit
In theory, it is believed that having a current account deficit is not good for an economy. It shows that you
are importing more (in value) than you are exporting and therefore money is flowing out of your country, which
could have a negative impact on GDP. The UK’s current account deficit is around 6% of GDP, as a rough rule
of thumb, around 3% of GDP is considered an acceptable deficit if it has a specific (and temporary) reason
to exist
One argument evaluating a current account deficit involving competitiveness and how it is a disadvantage
A deficit may show a lack of competitiveness for an economy. If they are not exporting as much as they
are importing, it suggests that firms are not productive or are not producing quality products. This would
be a major concern for any government as this can be a difficult problem to solve.
How is a strong currency in a deficit not necessarily bad
A deficit might be due to a strong currency and this might not necessarily be bad. A strong currency
normally means that investors have faith in an economy and are willing to send investment flows in. It also
means that imports become cheaper, which makes the deficit worse, but it also means that inflation is
kept low as costs are kept down.
How may a deficit indicate that there is strong economic growth in a country
as incomes are rising and more
imports are being purchased.
in the short term a deficit is good why
In the short term, a deficit might occur as raw materials are imported in order to manufacture them and
add value, so that in the long term, exports increase.
A deficit could be due to foreign firms setting up in a country and sending profits back
explain why this is a good situation for the non foreign country
This could be
good for the country as a whole as foreign investment will often bring jobs and increase growth for an
economy. It can also increase competition within the country which can lead to lower prices and more
choice for consumers. Over time, the foreign firm also might start exporting which will end up as a
positive on the current account.
How would a deficit weaken exchange rate
A deficit (in theory) should weaken the exchange rate as there is excess supply of that currency on foreign
exchange markets. This is because demand for exports (which must be paid for in the exporting country’s
currency) is lower than the demand for imports (which creates the supply of the that currency on the
market). Therefore, it should mean that any imbalance should even out over time, although historically this
has not occurred for the UK.
How could a current account surplus lead to increased employment and all the other benefits of economic growth
A surplus indicates that your economy is extremely competitive as it is exporting more in value than it is
importing in value. This could also mean that export-led growth is occurring which can lead to increases
in employment and all the other benefits growth brings.
How can a current account surplus reduce living standards
A surplus might suggest that a country is exporting so much that there might not be enough to satisfy
domestic demand. This could lead to a rise in domestic prices which can reduce real living standards.
How could a current account surplus decrease the rate of economic growth
A surplus could indicate that there is low growth in a country and they are saving rather than spending on
imports. This could have wider implications on an economy as has been the case for Japan where they
have had sluggish growth for years.
why does the euro not strengthen for germany as it does as much for other EU countries
As indicated above, a surplus should lead to a stronger exchange rate and therefore over time, the
imbalance sorts itself out. However, one of the reasons why Germany has seen such a strong surplus is
because they are part of a monetary union and therefore the Euro has not strengthened as much as
it should have for Germany due to other countries in the Eurozone
The UK’s current account deficit could lead to fiscal deficit how
The UK’s current account deficit could have significant implications for the UK economy as it could lead to
reduced growth and increased unemployment. It could also lead to inequality as it is often the low skilled jobs
that have been lost to overseas production. It might also lead to a worsening of the fiscal deficit as low growth
and unemployment means lower tax revenues and higher benefit payments.
