Current Account of the Balance of Payments Flashcards
Balance of payments account
A record of a country’s economic transactions with the rest of the world over a year
Capital Account
Within the BOP, a record of the sale and purchase of copyrights, patents, trademarks, and money brought into the country by immigrants and taken out by emigrants.
Financial account
Within the BOP, a record of the transfer of financial and capital assets between the country and the rest of the world.
Components of the current account of the balance of payments
Trade in goods, Trade in Services, Primary income, Secondary income
Trade in goods
Refers to the exports and imports of goods such as cards, TVs, and clothing. The trade-in goods balance is the revenue earned from exports of goods minus the expenditure on imports of goods. The trade in goods balance can also be called the visible balance.
Trade in services
Refers to the trade in exports and imports of services, which may be referred to as invisibles.
Primary income
This includes income in the form of profits, interest, and dividends earned on direct investment abroad and foreign earnings on investment in the country.
Secondary income
Includes payment made and receipts received for which there is no corresponding exchange of an actual good or service. Transfers by private individuals are also included in this part of the current account.
Current account deficit
The value of debit items on the current account exceeding the value of credit items.
Current Account surplus
The value of credit items on the current account exceeding the value of debit items
The causes of current account deficit
The growing domestic economy, Declining economic activity in a country’s trading partners and Structural problems
The growing domestic economy
This form of current account deficit is not necessarily a problem. It is also likely to be short term and self correcting. Export revenue decreases as a result of goods being diverted from the foreign market to the domestic market.
Declining economic activity in a country’s trading partners
If the countries that buy this country’s imports experience recessions or slowdowns in economic growth. Their import expenditure may slow down or fall. It is not usually a problem as it is relatively short term and self-correcting
Structural problems
A current account deficit that lasts over the long run is more of a concern. This is because it indicates that domestic firms are not internationally competitive and that the country may have to borrow to finance the surplus spending. There are a number of causes of a lack of international competitiveness - These include an overvalued exchange rate maintained by government intervention and relatively high inflation rate. Low labour and capital productivity also result in a lack of international competitiveness. These, in turn, may result from poor quality education and training and a low level of investment and innovation.A structural deficit is a cause for concern as it will be self correcting.
Consequences of imbalances in the current account of the economy
A current account deficit allows the residents of a country to consume more products than the country produces. This is sometimes referred to as a country living beyond its means. However, The country will have to finance the deficit by attracting investment into the country or by borrowing. This will involve an outflow of money in the future in the form of investment income. An increase in a current account deficit may also reduce aggregate demand, which may slow down economic growth and may cause unemployment. The significance of the size of a current account deficit or surplus can be assessed more effectively by considering it as a percentage of the country’s gross domestic product(output) rather than seeing it in monetary terms.
