Lesson 12 - Balance of Payments Flashcards
What are the 2 aspects of the balance of payments?
Current account
Capital account
What is the Balance of Payments?
Record of transactions made between consumers, businesses + government in one nation or between nations
What are the 2 types of flows into the Balance of Payments?
Inflows/Positive entry
Outflow/Negative entry
What is each respective flow also known as?
Inflow - Credit
Outflow - Debit
What are the 4 main components of the current account?
Trade balance in goods
Trade balance in services
Net money transfers
Net investment income from abroad
What does trade balance in goods consist of?
Final manufactured goods, components, raw materials
Energy products, technology + machinery
What does trade balance in services consist of?
Banking, insurance, consultancy
Tourism, transport, logistics
Shipping, education, health
Reasearch, cultural acts
What does net money transfers consist of?
Overseas aid + debt relief
Private money transfers (E.g., remittances)
What does net investment income from abroad consist of?
Profits, interest + dividends from investments in other countries
What does the capital account include?
Flows of money for investment purposes
FDI, banking flows, government debt sold abroad
Does the UK have a current account surplus or deficit +explain?
Deficit (Consistently since 80s)
Importing more goods + services than it is exporting
What are the reasons for a current account deficit?
Overvalued exchange rates
High consumer spending
Unbalanced economy
Competitiveness
How does an overvalued exchange rate result in a current account deficit?
Expensive exports
Cheap imports
How does high consumer spending result in a current account deficit?
Increase in imports, causes current account deterioration
How does an unbalanced economy result in a current account deficit?
Focus on consumer spending rather than investments + exports
How does competitiveness result in a current account deficit?
Firm competitiveness relates to exchange rates
Competitiveness declines, exports made more difficult
What are the main explanations for the UK’s current account deficit?
Deficit in goods/Net importer
Financial flows - Investment from abroad
Economic cycle - Boom, demand for imports > exports
Low saving rate - Spending encouraged
Why should we be concerned about the current account deficit?
Sign of uncompetitiveness (Lower economic growth)
If capital dries up, exchange rate + living standards may depreciate
Sign of unbalanced economy
Why should we not be concerned about the current account deficit?
Been persistent since 80s
Globalisation makes flows easier to attract, flows can finance the deficit
Which policies can be implemented in order to reduce the deficit?
Reduced consumer spending
Side policies to improve competitiveness
Devaluation of the exchange rate (Cheap exports, costly imports)
