International Trade: How its recorded and financed.

Question 1

What is the Balance of Payments?

Answer 1

This is the record of all a country’s financial dealings with the rest of the world over the course of the world. It has three parts: the current account, the capital account and the financial account.

Question 2

What causes a current account deficit?

Answer 2

This is when the money leaving the country is greater than the money entering he county (value of imports > value of exports)

Question 3

What are the three parts of the current account?

Answer 3

• Balance of Trade: this looks at the value of imports and exports. Exports are goods and services made by UK companies and sold abroad. They appear as a positive entry as they bring money into the country. Imports are goods and services made abroad and sold to the people in the UK. They have a negative entry as money leaves the country. trade in goods is known as visible trade and trade in services is know as invisible trade.
• Income: this is made up of income earned by the UK citizens who own assets overseas. It includes profits, dividends on investments abroad (payments made to shareholders by companies who earn a profit) and interest.
• International transfers: These are usually money transfers between central governments (who lend and borrow money from each other) or grants, such as those hat we receive as part of the CAP from the EU. However, our transfers to the EU are normally in deficit- we give EU more money than we receive.

Question 4

What is CAP (Common Agricultural Policy)

Answer 4

The Common Agricultural Policy (CAP) is the agricultural policy of the European Union. It implements a system of agricultural subsidies and other programmes. It was introduced in 1962 and has undergone several changes since then.

Question 5

What is the Capital Account?

Answer 5

Refers to transactions in fixed assets and is relatively small. The largest aspect of capital account refers to flows of capital associated with migration. As immigration into the UK increases, this increases the surplus on the capital account as immigrants assets become part of the UK’s assets. This account has been in surplus for 20 years now.

Question 6

What is the financial account?

Answer 6

Refers to transactions in financial assets, or what is commonly known as Foreign Direct Investment. Significant surplus over the past 6 or 7 years.

Question 7

Ways of correcting the balance of payments current account.

Answer 7

• Expenditure reducing policies require the government to cut the income of its citizens, so they spend less on imports for example through deflationary fiscal policy (which is unpopular); however a side-effect of this is that spending on domestic goods also decreases, so AD falls. This can reduce economic growth and cause recession.
• Expenditure switching policies require the government to find ways of reducing its citizens spending on imports, using protectionist measures such as tariffs or quotas, or eye a devaluation of the currency under fixed exchange rate regime. However this often leads to retaliation, exports will also fall and the current account deficit may not be corrected.
• Supply side policies, such as spending on education and training in order to improve the quality and therefore competitiveness of exports, aim to boost export demand rather than reduce import demand. Whilst they can incur an opportunity cost, they contribute positively to economic growth and can be anti-inflationary in the long run.