Measures of Economic Performance - Balance of Payments

Question 1

Balance of Payments terms

Answer 1

Balance of Payments: a record of all the flows of money between the
residents of one country and the rest of the world

Import: an overseas produced good/service purchased by UK citizens
resulting in an outflow of income from the UK

Export: a UK produced good/service sold overseas resulting in an inflow of income into the UK

Current account on the balance of payments: the section of the balance
of payments that records international trade in goods, services, primary income & secondary income

Balance of trade in goods and services: the value of exports of goods & services minus the value of imports of goods and services. If this is
positive, there is a trade surplus, if it is negative there is a trade deficit

Question 2

Running a current account deficit

Answer 2

• Suggests a lack of international competitiveness/supply-side
  weakness
• Withdrawal from the circular flow (X<M) reducing AD, slows growth
• Loss of jobs in home-based industries (regional & structural
  unemployment)
• May cause a depreciation of the currency & some inflationary pressure
• Foreigners may own more UK assets
• More imports can add to the standard of living
• Imports of capital goods can help boost development
  Running a current account surplus -For a surplus, the outcomes of a
  current account deficit can be reversed.

Question 3

Current account on the balance of payments

Answer 3

The current account records the exports and imports (inflows and
outflows) for these categories:

Trade in goods – oil, energy, raw materials, food, manufactures, semi-
manufactures, components, capital goods etc.

Trade in services – finance, insurance, business services, consulting,
travel/tourism, telecommunication and information etc.

Primary income (net investment income) – the inflow of interest, profits and dividends on UK assets held abroad, less the outflow of interest, profits and dividends of foreign-owned assets in the UK.

Secondary income – net current transfers between countries such as
foreign aid, gifts, payments to and from EU (due as part of the TCA).

Current account balance: the value of exports less the value of imports for goods, services, primary and secondary income.

Question 4

Causes of a current account deficit

Answer 4

Cyclical causes

• Overvalued exchange rate
• Boom in domestic demand
• Recession in key export
  industries
• Slump in global prices of exports
• Increased demand for imported
  technology
• Increase in global
  energy/commodity prices (for
  net importers)

Structural causes

• Under-investment
• Relatively low productivity
• Persistently high relative
  inflation
• Inadequate R&D, innovation
• Emergence of low-cost
  competition (emerging markets)
• Increase in global
  energy/commodity prices (for
  net exporter)