lesson 16- balance of payments Flashcards
what is the balance of payments
a record of all financial dealings over a period of time between one country and all other countries
what two accounts is the balance of payments split into
current and financial
what is the current account
where payments for purchase and sale of goods and services are recorded
-trade in goods- ‘visibles’- exports are sold and payments come in->
positive flow
-imports -> money flow out of country -> negative flow
trade in services- ‘invisibles’- US tourist pays for UK hotel -> positive flow as money into UK
-UK tourist pays foreign hotel - negative flow (invisible exports)
primary income-interest, profits and dividends on assets owned abroad that is received into the UK. Also has to be payed out on UK assets owned by foreigners
secondary income- mainly government transfers to and from overseas organisations
what is the financial account
-includes transactions that result in a change of ownership of financial assets and liabilities between a countries residents and non residents
-net balance of FDI
-net balance of portfolio investment (flows of debt and equity)
-balance of banking flows (hot money flowing in or out commercial banks)
what is the capital account
very small- can largely be ignored as it takes up a tiny part of the balance of payments
-includes effect of:
-debt forgiveness
-sale/ transfer of patents
-copyrights
franchises
-leases
measures the value of changes in international transfers of ownership
what determines whether economies benefit or suffer from changes in the current account
PED for imports/exports
-currency/price changes
-non price factors
-gov/central bank intervention
-main trading partners
-size of the defecit/surplus
why are economies interconnected
proportion of output of an individual economy which traded internationally is growing
-increasing ownership of assets e.g. companies/shares abroad
-migration
-tech shared between countries
factors that affect exports/imports
-price
-exchange rates
-inflation rates
-international competitiveness
-protectionism
-relations between countries
-non price factors
why do governments want equilibrium/surplus balance of payments
economic stability
-sustainable growth
-confidence in the economy ->investment
-employment and production
-currency stability
what is the balance of payments always equal to
0
how is balance of payments recorded
using a double entry bookkeeping system
-inflow and outflow is recorded
what is FDI
flows of money to purchase a controlling interest in a foreign firm
=10% or more of the ordinary shares or voting power of a firm
-part of FDI is reinvested earnings: profits of foreign owned companies are reinvested into the company
what is portfolio investment
flows of money to purchase foreign shares where this is less than 10% of the company
-e.g. bonds
what are examples of other investment
trade credit
loans
purchases of currency and bank deposits
advantages of international capital flows
facilitate growth in world trade because it is helping to finance that growth
-provides capital for firms that wouldn’t be able to secure finance locally -NEEs
-transfer of tech and info
disadvantages of international capital flows
- worlds systems are vulnerable to problems e.g.2008 financial crisis
-may lead to overborrowing
-firms become owned by overseas firms
what are global trade imbalances
if a country consistently has a current account surplus or deficit it can cause a buildup of stock or assets abroad, or the country will owe more and more to foreign creditors
