Theme 2- Balance Of Payments Flashcards
What is the current account?
It is an account mainly identifying the transactions in goods and services between residents of one country and the rest of the world.
Wha is the financial account?
It is an account identifying transactions in financial assets between the residents of a country and the rest of the world.
What is the capital account?
It is an account identifying the transactions in capital between the residents of one country and the rest of the world.
What is the balance of payments?
It is a set of accounts that monitors the transactions that take place between the residents of the UK and the rest of the world.
The difference between credit and debit.
Every transaction can be identified as credit or debit.
- credit = money flowing into the country
- debit = money flowing out of the economy.
The impact of more money leaving than coming in?
If more money is leaving than coming in then there is a decrease in exports or an increase in imports causing AD to decline. This will cause the price level to drop, output drops and economic growth will decrease.
Main components of the current account?
- Trade in goods and services - exports and imports.
- International transfer
- Investment incomes - employment income earned abroad and sent home. It is made up of profits and dividends.
How to calculate the balance of trade.
(Total values of X + inflows from net international transfer) - (total value of M + outflows from net international transfer)
What do the results of the balance of trade mean?
X=M its in balance
X>M trade surplus
X
Causes of a current account deficit?
- Domestic firms being less price competitive or less competitive in terms of quality.
- Relatively higher economic growth
- Strong pound
- Long term decline in manufacturing
- Recession or slow growth in economies of trading partners.
How effective is reducing AD to influence the current account deficit?
- Decreases employment
- Reduces business profits.
- Success depends on business reaction
- Depends in the stage of the economy.
Effectiveness of weakening the pound to alleviate the current account deficit?
- lack of investment means they can’t increase productive capacity.
- cost push inflation
- encouraged to sound by decreasing interest.
Investment in domestic production as a way of reducing the current account deficit?
- Expensive to the taxpayers
- Depends on what it is spent on.
- government revenue decreases if corporation tax decreases.
Protectionism as a way to help the current account deficit.
- depends on the size of the tariff
- depends on PED of imports.
- depends on change in the value.
- countries may react by charging on our goods.
