The Balance of Payments (BoP) Flashcards
What is the Balance of Payments (BoP)?
A comprehensive record of all economic transactions between residents of a country and the rest of the world over a specified period.
Transactions include trade in goods and services, capital transfers, and financial capital flows.
What are the main components of the Balance of Payments?
Current Account, Capital Account, Financial Account.
Each component has specific subcategories that detail different types of economic transactions.
What does the Current Account record?
Flows of goods, services, income, and transfers.
It includes balances of trade in goods and services, primary income, and secondary income.
What is included in the Balance of Trade in Goods?
Exports and imports of physical products.
This reflects the trade performance of a country regarding tangible goods.
What does Primary Income in the Current Account represent?
Net income from investments abroad minus payments to foreign investors in the domestic economy.
It includes dividends and interest from foreign investments.
What does Secondary Income in the Current Account include?
Transfers such as foreign aid, remittances, and contributions to international organisations.
These are unilateral transfers that do not involve a quid pro quo.
What is recorded in the Capital Account?
Non-financial assets and capital transfers.
This includes the acquisition or disposal of non-produced, non-financial assets.
What transactions are recorded in the Financial Account?
Transactions in financial assets and liabilities.
It includes net direct investment, net portfolio investment, other capital flows, and drawings on reserves.
What is the significance of the Net Direct Investment?
Investments in physical assets abroad or by foreigners domestically.
It reflects long-term investment strategies.
What do ‘hot money’ flows refer to?
Short-term financial flows influenced by interest rate differentials and investor sentiment.
These can cause volatility in the financial account and exchange rates.
What was the UK’s Current Account deficit in 2014?
£92.9 billion (5.15% of GDP).
Significant deficit in trade in goods (£123.7bn) offset partly by a surplus in services (£89.1bn).
What does the Marshall-Lerner Condition state?
A depreciation of the currency improves the trade balance if the sum of the price elasticities of demand for exports and imports exceeds one.
This condition links currency depreciation to trade performance.
True or False: The Twin Deficits Hypothesis suggests a link between a current account deficit and a fiscal budget deficit.
True.
It posits that government borrowing may increase imports, worsening the trade deficit.
What is the J-Curve Effect?
Following depreciation, a trade balance may initially worsen before improving.
This occurs as export volumes increase and import volumes decrease due to price effects.
What was the UK’s Current Account deficit in 2023?
£53.3 billion (2.0% of GDP).
This reflects improved trade balance in goods and services compared to 2014.
What policy implications arise from the Balance of Payments?
Monetary Policy, Trade Policy, Structural Reforms.
These strategies aim to stabilise the economy and improve the BoP.
Fill in the blank: A country with a persistent BoP deficit may face downward pressure on its _______.
currency.
This can lead to depreciation of the currency.
What are some structural reforms to enhance competitiveness?
Education, infrastructure investment, technological innovation.
These structural reforms aim to strengthen the economy and enhance competitiveness.
What does the term ‘sustainability of deficits’ refer to?
Persistent current account deficits may indicate structural weaknesses, but deficits financed by stable capital inflows may not be problematic.
This highlights the importance of the nature of the capital inflows.
What role does the US’s reserve currency status play in its current account deficits?
It allows for persistent current account deficits financed by capital inflows.
This demonstrates the unique position of the US in the global economy.
What was a key change in the UK’s trade dynamics post-Brexit?
Services played an increasingly critical role in balancing goods deficits.
This shift reflects broader changes in trade relationships.
