Chapter 5 - The Balance of Payments, Exchange Rates and International Competitiveness Flashcards
What is the balance of payments?
A set of accounts showing one country’s financial transactions with other countries.
The Current account of the Balance of payments?
Trade in goods balance
Trade in services balance
Investment income
Current transfers: Payments received - payments paid (aid)
When does a current account deficit occur?
When the value of exported goods and services is less than those imported.
The capital and financial accounts of the balance of payments?
Concerned with changes of ownership of UK’s foreign financial assets and liabilities.
FDI
Portfolio investment : Purchase of UK shares and bonds by foreigners - Foreign Purchases by UK citizens.
Short-term capital flows: AKA Hot money flows
ChAnges in foreign currency reserves
What part of the balance of payments does the UK usually have a surplus on?
The capital and financial accounts as it is good at attracting FDI.
What is a key feature of the balance of Payments?
It MUST balance each year
Why has the UK persisted to have a current account deficit?
Low productivity
High sterling value from 1992-2008
Continued economic growth between 1996-2008 as the UK has a marginal propensity to import
Despite the 28% depreciation of the sterling between 2008-2009, there was slowdown in the EU, which buys 45% of UK exports.
Significance of a current account deficit?
Goods are seen as uncompetitive
May lead to an increase in unemployment
May be forced to borrow money from the IMF or other countries
With a floating exchange rate, a persistent current account deficit may depreciate the exchange rate.
When might a deficit on the current account not be a problem?
When it is caused by an import of capital goods
If it is only short term
If it is easily balanced by a surplus on the financial and capital account
Measures to reduce current account deficit?
Reducing corporation tax. Improved Infrastructure. Superfast Internet Training and education Reduction in regulation and red tape Modern Apprenticeships Reduction in employers' national insurance contributions Improved childcare provision.
When did the UK cut corporation tax and why?
28% in 2010 to 21% by 2014. To encourage investment back into the firms, leading to increased efficiency.
Provide an example of increased infrastructure
Crossrail and the second Forth Bridge in Scotland. In 2012 the UK government offered guarantees designed to underwrite the financing for $40 billion of stalled projects within the National Infrastructure Plan. Supply side
What is the Trade-weighted Index?
When one currency is measured against a number of different currencies weighted according to their relative importance
What Factors Influence Exchange Rates?
Relative Interest Rates
Relative Inflation Rates: Higher inflation rates compared to competitors then its purchasing power will fall relative o its competitors and, in the long term, it is likely that its exchange rate will fall. Explained under Purchasing Power Parity.
Current Account Balance: A persistent current account deficit implies that the supply of its currency is increasing relative to demand for it, resulting in a depreciation of its currency.
FDI
Speculation
What are the effects of a depreciation in the value of a currency?
Decreases in foreign currency price.
An increase in the domestic price of imports.
Both would cause an increase in competitiveness and should improve the current account of the BoP.
Will increase AD, causing a rise in real output and increase in the price level.
Costs-push inflation from higher commodity prices.
Rise in real output should reduce unemployment.