The Open Economy - Balance of Payments Flashcards
The total flows between countries are measured by the current
account: (4)
- trade in goods
- trade in services (including tourism)
- primary income
- secondary income
Financial flows between countries (other than primary and secondary income), such as: (3/3,2)
Financial flows between countries (other than primary and secondary income), such as:
- foreign direct investment (purchases of land, buildings, takeover of companies),
- foreign portfolio investment (purchases of shares, bonds)
- international lending.
Link between Current Account and Financial Account
A country with a current account surplus will have a…
For example (supposing that there were only two countries in the world), the UK buying a fridge magnet from Germany for £3.42 represents a 4 euro trade surplus for Germany, while at the same time the UK has sold £3.42 to Germany and Germany has spent euro on acquiring sterling. This represents a financial flow towards UK assets (in this case currency).
A country with a current account surplus will have a corresponding deficit on the financial account.
For example (supposing that there were only two countries in the world), the UK buying a fridge magnet from Germany for £3.42 represents a 4 euro trade surplus for Germany, while at the same time the UK has sold £3.42 to Germany and Germany has spent euro on acquiring sterling. This represents a financial flow towards UK assets (in this case currency).
Financial flows and currency accumulation
In a world with many countries and foreign exchange markets, the above example would imply sterling being sold to someone (but not necessarily in Germany) for euros, such that the total amount of sterling being held by the ‘rest of the world’ has
___________ and this is recorded as a ___________ ____ towards the UK on the ____________ ___________.
A country with a trade deficit must have a _________ _________(net sales of financial assets, including currency) with respect to the rest of the world and vice versa.
In a world with many countries and foreign exchange markets, the above example would imply sterling being sold to someone (but not necessarily in Germany) for euros, such that the total amount of sterling being held by the ‘rest of the world’ has
increased and this is recorded as a financial flow towards the UK on the financial account.
A country with a trade deficit must have a financial surplus (net sales of financial assets, including currency) with respect to the rest of the world and vice versa.
Currency Accumulation
Typically a country that is running a persistent trade surplus and thereby accumulating foreign currency will not simply hold the currency as deposits.
For example, the People’s Bank of China is believed to hold around USD$1tn of USA government debt. Similarly, private sector entities with foreign currency holdings will probably…
Currency Accumulation
Typically a country that is running a persistent trade surplus and thereby accumulating foreign currency will not simply hold the currency as deposits.
For example, the People’s Bank of China is believed to hold around USD$1tn of USA government debt. Similarly, private sector entities with foreign currency holdings will probably to buy financial assets denominated in those currencies, in order to achieve a positive return
Is a current account deficit funded by borrowing?
What do economic commentators often refer to?
I receive my pay from the university and then buy a fridge magnet from Germany - I haven’t borrowed anything and I don’t have any debt obligation to the German producer, I have
paid them now.
Over time, at a national level, the foreign holders of sterling might buy assets such as _____ , implying a ____ _______, but this is still after the ______ ______ _________.
Economic commentators often refer to the UK current account deficit (data to follow) as the UK borrowing from the rest of the world.
I receive my pay from the university and then buy a fridge magnet from Germany - I haven’t borrowed anything and I don’t have any debt obligation to the German producer, I have
paid them now.
Over time, at a national level, the foreign holders of sterling might buy assets such as bonds , implying a debt obligation, but this is still after the initial trade purchases.
Borrowing?
Therefore it is possible to have a trade deficit without…
However, an alternative perspective would be to consider the _______________ ______ held by ___________ as an ________ ___________to provide foreigners with real ______ and _________ at some point in the _________, should they decide to buy such.
Therefore it is possible to have a trade deficit without having borrowed any ‘money’ from the rest of the world.
However, an alternative perspective would be to consider the accumulated sterling held by foreigners as an implied obligation to provide foreigners with real goods and services at some point in the future, should they decide to buy such.
Borrowing? More
With respect to sales of financial assets such as shares one might consider the UK’s recent history to be a case of __________ ownership of companies for consumption goods. For example, Northumbrian Water is owned by a company in _____ _____, _________ _______ is owned by a company in Malaysia, _____________trains is owned by Deutsche _____ etc. Likewise with property.
With respect to sales of financial assets such as shares one might consider the UK’s recent history to be a case of trading ownership of companies for consumption goods. For example,
Northumbrian Water is owned by a company in Hong Kong, Wessex Water is owned by a company in Malaysia, Crosscountry trains is owned by Deutsche Bahn etc. Likewise with property.
International Investment Position
What does the Financial Account record?
What does the International Investment Position record?
- The Financial Account records the flows within a given period
- The International Investment Position records the total stocks of international assets held by the UK and of UK assets held by foreign owners
