The balance of payments Flashcards
what is the current account balance?
measures the difference between money and credit going in and out of an economy (through exports imports and income paid on assets both home and abroad)
what is the current account surplus?
net external trade and income is positive
what is the current account deficits?
net external trade and income is negative leading to a net outflow of demand from the circular flow
what is the effective exchange rate index?
trade weighted external value of a currency
what are financial flows?
flows of capital across national borders including debt and equity
what are excess savings?
when gross national savings are greater than gross capital investment
what is the capital financial account?
balance of investment flows into and out of a country
what does the current account consist of?
- balance of trade in goods
- balance of trade in services
- net primary income (interest profit dividends etc.)
- net secondary income (transfers i.e. contributions to EU)
what is the capital account?
- sale/transfer of patents, copyrights, franchises, lease and other transferrable contracts
- debt forgiveness
- capital transfers of fixed assets
what is the financial account?
include transactions that result in a change of ownership of financial assets and liabilities between UK residents and non-residents
what does the financial account consist of?
- net balance of FDI
- net balance of portfolio investment flows
- balance of banking flows
- changes to the value of reserves of gold and foreign currency
what is FDI?
investment from one country into another that involves establishing operations or acquiring tangible assets including takes in other businesses
what is inward and outward FDI and their effects on UK accounts?
- inward is another business from another country setting up operations in the UK which is positive for UK accounts
- outward is a UK firm setting up abroad which is negative for the UK BOP
causes of a deficit on the BOP?
- high levels of consumer spending (low savings rate)
- its struggling to compete internationally
- it has to deal with external shocks ( e.g. world prices of raw materials)
causes of a surplus on the BOP?
- economy is experiencing a recession
- domestic currency has low value
- high interest rates are causing more savings and less spending
consequences of a deficit on the BOP?
- indicates an economy is not competitive
- people are wealthier and have a higher standard of living
- fall in value of currency in the short run
- job losses domestically
consequences of a surplus on the BOP?
- shows and economy is competitive
- surplus for a prolonged period may cause stagnation due to low demand thy may experience low or negative growth.
- overreliance on exports
- surplus created by undervalued currency means that inflation may rise
what is stagnation?
due to low demand they may experience low or negative growth.
how do you reduce a BoP deficit?
- expenditure switching policies
- expenditure reducing policies
- supply side policies
evaluations of reducing a BoP deficit?
- devaluation of the currency (not really used as all govts have to agree)
- fall in interest rates, fall in reward for saving, increase of outflows of hot money so increase supply of sterling lowers ER = WPIDEC
