Macro- Balance Of Payments Flashcards
What is the Balance of Payments?
Records all flows of money into and out of a country
What are the different parts of the Balance of Payments?
The Current account
The Capital account
The Financial account
What makes up the current account?
Trade in goods
Trade in services
Investment and employment income (primary income)
Transfers (secondary income)
What makes up the trade in goods?
Measures imports and exports of physical goods e.g. tvs apples
UK’s biggest exports include things such as machinery, pharmaceuticals and mechanical appliances
UK’s biggest imports include machinery and mechanical appliances along with mineral fuels (e.g. oils)
What makes up the trade in services?
Measures imports and exports of services, such as insurance or tourism
Some of UK’s biggest exported services are Banking and Insurance
UK’s biggest imported services include tourism (holidays abroad)
What makes up investment and employment income (primary income) in the current account of the BOP?
Flows of money into and out of the country resulting from employment or earlier investment
Deposits in foreign banks receive INTEREST PAYMENTS
Businesses set up overseas by a uk company will earn profits for the UK parent company
Shares bought in foreign firm will bring dividend payments to the UK shareholder (shares themselves won’t appear on the current account)
Salaries paid to uk residents who are working abroad
What are transfers or secondary income on the BOP?
Movements of money between countries which aren’t paying for goods or services and aren’t due to an investment
Transfers include payments made to family members abroad and aid paid to or received from foreign countries
What is included on the Capital account of the BOP?
Transfers of NON-MONETARY and FIXED ASSETS
Most important part of flow of those through immigrants and emigrants (e.g. when an immigrant comes to UK their assets become part of the UK’s total assets)
What is included in the Financial Account of the BOP?
Movement of financial assets, includes:
Foreign Direct Investment (FDI) - firm in a country making an investment in a different country
Portfolio investment- investments in financial assets e.g shares in overseas companies / foreign individuals / companies buying shares in UK companies
Financial derivatives- financial contracts , often in foreign currencies
Reserve assets - foreign currency reserves held by Bank of England
Note that income from the financial account e.g. interest is recorded on the current account
Why is it called the balance of payments?
The current account balance should balance the capital and financial accounts
Due to errors and omissions often doesn’t - so balancing figure is needed
What is a balance of payments defecit on the current account?
More flows of money out a country than those coming in
Why would a country want to decrease its Balance of payments defecit on the current account?
Could cause a depreciation of a currency
Possible risk of capital flight
Could deplete currency reserves
Increase international debt (surplus on financial account to offset)
Could indicate lack of productivity
Deflationary pressure
Could indicate structural weakness e.g. Labour immobility
What are the impacts of a currency depreciation?
Import inflation- cost of imports goes up- particularly bad if high dependency on imports
COST PUSH INFLATION- workers may demand rises to keep pace with increase in prices arising from import prices up.
Higher debt repayments if debt in foreign currencies (need more local currency to repay debt if currency had weakened) - BORROWING COSTS UP
LOSS OF INVESTOR CONFIDENCE- might see depreciation as a sign of instability - leading to CAPITAL FLIGHT (withdrawal of foreign investment)
Multinational business may not invest in country if see instability
Other countries may retaliate and depreciate- could lead to trade wars
May lead to government increasing interest rates/capital controls (how much can be moved) or IMF bailout
Could be positive- if improves export competitiveness without the negatives
What is capital flight?
When foreign and domestic investors withdraw capital from the country (fearing devaluation)
What is a currency run?
BOP crisis can trigger a run
Can finance through currency reserves or borrowing
Declining foreign currency reserves- when low, struggle to support currency in the markets
Speculative attacks - if investors believe overvalued and unsustainable may start selling driving down value
Capital flight- foreign and domestic investors take capital overseas
High external debt- if foreign denominated debt them depreciation increases borrowing costs- problem gets worse
Loss of policy credibility
