Macro Unit 5- Balance Of Payments Flashcards
What is the balance of payments?
The BOP measures the UK’s record of economic activities with other countries- imports and exports. We are concerned with the current account and our trade with other countries
- When is there a surplus in the BOP
2. When is there a deficit in the BOP
- Exports> imports= surplus
2. Imports> exports= deficit
What is the balanced government budget?
One where government revenue is = to government expenditure
What financial institutions does the government borrow from?
- Banks
- Pensions
- Private investors
- Overseas investors
They lend the government money and charge interest for repayment.
What 3 accounts does the BOP consist of?
- Current account
- Capital account
- Financial account
What is the current account?
A record of all payments for trade in goods and services plus income flow and it is divided into 4 parts.
- Balance of trade in goods (visible) e.g. capital technology and consumer goods
- Balance of trade in services (invisible) e.g. banking, education
- Net income flow- primary income flow- e.g. income from investment and employment abroad, profit, interest and dividend from investments in other countries
- Net current transfers- secondary income flow e.g. overseas aid/debt relief, military goods, donations to charities
- What are positive primary balance
2. What are negative secondary balance?
- Companies abroad are bringing money into the U.K.
2. We are giving more money away to other countries than we are gaining e.g. debt relief
What is the capital account?
The capital account is selling capital and fixed assess e.g. privatisation of public organisations or land etc.
What is the financial account?
This is a record of all transactions for financial investment. It includes
- Direct investment- this is net investment from abroad e.g. if a U.K. firm built a factory in Japan
- Portfolio investment- these are financial flows such as the purchase of bonds or savings in banks.
- Short term monetary flows known as ‘hot money flow’ to take advantage of interest rates/ exchange rates- e.g. foreign investor with sums of cash saving money in U.K. bank to take advantage of better interest rates
What is the relationship between the current and financial account?
A deficit on the current account is balanced by a surplus on the financial account.
How is the current account deficit financed?
Financed by net inflows on the financial account of BOP
What is a credit and a debit on the balance of payments ?
Credit- if money enters the economy
Debit- if money exits the country
What does the Prebisch-singer hypothesis argue?
That the price of primary commodities declines relative to the price of manufactured goods over the long term, which causes the terms of trade of primary-product-based economies to deteriorate. (LEDCS)
What are the consequences of a current account deficit?
- Loss of AD if there is a trade deficit which causes weaker real GDP growth and reduced living standards and rising unemployment
- Big current account deficits will cause the currency to depreciate leading to higher cost-push inflation and a deterioration in the terms of trade
- Can lead to currency weakness and higher inflation and a country may run short of vital foreign currency reserves. -countries don’t demand the point
- Trade deficit might be a reflection of lack of competitiveness/ supply-side weakness in the economy- SPICED
- Some countries running current account deficits may choose to borrow to achieve a financial account surplus- increases risks- all 3 accounts are in a deficit
- Unsustainable current account deficits can ultimately lead to a loss of investor consequence, leading to capital flight and a currency/ BOP crisis- investment into our country decreases as there’s no incentive
When may a BOP crisis occur?
When a county Connor pay for essential imports or services it’s debt I.e. pay interest, often as a result of currency devaluation.
What are the key dangers of running persistent trade deficits?
- Lower AD- slower growth
- Undermine the standard of living
- Loss of jobs in home based countries
- Currency weakness
- Countries may run short of vital foreign currency reserves.
- Loss of investor confidence
What is the difference between structural and cyclical of the current account surplus
Structural causes: (supply side)
- Surplus of savings over investment
- Significant long run competitive advantage
- Long run raise in global prices of main exports
- Structural increase in net investment income
- Trend rise in factor productivity
Cyclical causes: (more short term)
- Depreciation of the exchange rate
- Strong consumer demand in key export markets
- Cyclical improvement in the terms of trade
- Fall in prices of imported energy/ components
- Rise in net inflows of remittances/profits
Why is a current account surplus a good thing?
- Might cause demand-pull inflationary pressure- boosts in disposable income lead to higher consumer confidence and purchasing power increasing AD shifting it out
- Contributor to GDP I.e. net external demand is positive- more money being injected into the economy
- Allows a country to be a net exporter of capital- exports will increase greater than imports so there are more injections into the circular flow boasting the economy- providing employment and further consumption
Arguments for improvement in the Balance of trade in goods and services?
- Supply side policies shift out- expand the productive potential e.g. improvement in education- structural changes- better quality and quantity of goods and services- more competitive
- Can be divided into free market and interventionist policies:
Free market aim to increase efficiency by removing things which interfere with the free market e.g. tax levels and deregulation
Interventionist- correcting market failure- they include government spending on education, subsidies for research- to help firms export their goods to expand AD - Investment in infrastructure to suppprt businesses and industries involved in international markets lead to direct and indirect jobs- spill over effect- more AD- increase employment and confidence.
