Price Stability and Satisfactory balance of payments Flashcards
What is inflation?
general rise in average prices across the economy. the rate of inflation is measured by the annual percentage change in consumer prices.
What does inflation lead to?
a decline in the value of money
When does inflation occur?
when most prices are rising by some degree across the whole economy.
What is inflation’s target rate?
2%
What is deflation?
negative inflation, which involves a falling average price level
What is disinflation?
occurs when rate of inflation is falling but is still positive
What is CPI?
official measure used to calculate the rate of consumer price inflation in the UK. gives a weighting to different goods depending on how important they are in a typical basket of goods
What does the UK gov use CPI for the indexation of?
state pensions
welfare benefits
setting a monetary policy target
Inflation rate calculation:
inflation rate= (CPI2-CPI1)/CPI1
Limitations of CPI as a measure of inflation:
- not fully representative
- spending patterns
- changing quality of goods and services
- new products- CPI slow to respond
definition of Balance of payments:
shows all the payments and receipts made between consumers,businesses and the government in one country with other nations, which involves the exchange of different national currencies.
what are types of payments received from other countries:
inflow, credit, positive input, demand for domestic currency
what are types of payments made to other countries:
outflow, deficit, negative input, supply of domestic currency
what are the three components of BoP?
current account, financial account, capital account
what are exports?
domestically produced goods or services sold to residents of other countries
what are imports?
goods or services produced in other countries and sold to residents of this country
what is a current account?
CA measures all the currency flows into and out of a country in a particular time period in payment for exports and imports, together with income and transfer flow
what is balance of trade?
difference between the money value of a country’s import and exports. its the largest component of a country’s balance of payments on current account
what is a balance of trade deficit?
money value of a country’s imports exceeds the money value of exports
what is a balance of trade surplus?
money value of country’s exports exceeds the money value of imports
what are the 4 components added together to create current account
- trade in goods (visible trade)
- trade in services (invisible trade)
- income payments (primary income)
- profits, dividends
- employee income from abroad (remittance)
- current transfers (secondary income)
- transfer made or received by central gov and
individuals - transfer from international organisations
-tax n social contributions
-bilateral aid flow, military grants
- transfer made or received by central gov and
if a country runs a current account deficit what does that mean?
debit is greater than credit. outflow of demand and income from country’s circular flow of income. aggregate demand will fall.
if a country runs a current account surplus what does that mean?
debit is smaller than credit. inflow of demand and income from a country’s circular flow of income. aggregate demand will rise.
whats the difference between trade deficit and current account deficit?
- trade deficit means value of imports is greater than value of exports
- CA deficit means outflow due to trade in goods and services, CA includes primary and secondary income are greater than inflow.
- trade is only a component of current account
reasons for current account surplus
- export-oriented growth: strong international competitiveness
- strong income from overseas investment
- price factors
- rise in price of exports, fall in price of imports
- high interest rate
- undervalued exchange rate
reasons for current account deficit
- higher consumer spending on imports
- weak international competitiveness
- imposition of trade barriers by trading partner
- economic downturn in exporting destinations
- price factors
- fall in price of exports, rise in price of imports
- low interest rate
- overvalued exchange rate
- inflation
what does current account deficit mean?
an economy is not paying its way in the global economy. means a country is drawing in money from elsewhere and as a consequence building up corresponding liabilities.
what is financial account
FA records flow of money into and out of a country to pay for investments in capital, shares and loans
4 components of financial account
- foreign direct investment- foreign firm sets up factory…
- portfolio investment- purchase of loans, shares, bonds
- financial derivatives- financial instrument whose underlying value is based on another asset
- reserve assets- gov transaction in foreign exchange reserve
what is hot money
short-term investment or large sums of money moved by investors from country to country to in search of the best interest rates.
causes large change in the financial account balance
what is capital account
flow of money into and out of a country to pay for a change of ownership of fixed assets or cancellation of debts.
size of cap acc are small compared to curr acc and fin acc.
largest amounts are due to transfer of fixed assets when overseas firms and workers move to UK
what is satisfactory balance of payments?
country can only enjoy a trading surplus if at least one other country suffers a trading deficit.
