Theme 4 Flashcards
3 sections of the BoP
Current Account, Capital Account, Financial Account
Areas of the current Account
Balance of trade in goods, balance of trade in services, net primary income, net secondary income
Areas of the capital account
Transfer of ownership of fixed assets, sale/transfer of patents
Areas of the Financial Account
Net balance of FDI, balance of banking flows, changes to value of gold reserves
What must the BoP always be?
Final value of 0
Reasons for surplus and deficit is
Uneven distribution of natural resources, differential competitiveness, inflation, domestic and government spending
Reasons for a current account deficit
Poor price and non-price competitiveness, strong exchange rates effecting demand for imports and exports, recession in one or more trade partner countries, volatile global prices
Structural causes of a current account deficit (long-term)
Under-investment, relatively low productivity, persistently high relative inflation, inadequate r and d, emergence of lower cost competition
Cyclical causes of a current account deficit
Over-valued exchange rate, boom in domestic demand, recession in key export markets, slump in global prices of exports, increased demand for imported technology
Recession
2 consecutive quarters of negative growth
Significance of a current account deficit
Outflow of AD on circular flow of income, drag in GDP growth, loss of jobs in export sectors, fall in foreign exchange reserves, weakened exchange rate
Difference between Fiscal and Trade deficit
Fiscal - government debt, Trade - Current Account deficit
Consequences of a current account deficit
Lowers AD, debt burdens, worsens exchange rate
How is Lower AD a consequence of a current account deficit?
Lowers demand, which lowers growth and increases unemployment
How are debt burdens a consequence of a current account deficit?
To balance deficit, countries must have a financial account surplus. To gain a surplus, countries sell bonds and use hot money, which causes issues as doesn’t help the current account deficit and as debut increases, other countries lose confidence as don’t receive money back
How is a worsening exchange rate a consequence of a current account deficit?
Large amount of imports mean more countries gain the pound, so the supply increases which worsens the exchange rate
Expenditure switching policies
Exchange rate, protectionism, deflationary, supply-side, government investment in industry
Deflationary Policy
Tight Fiscal and Tight Monetary Policy - leads to a drop in import demand
Benefits of Supply-Side Policies
Drop in prices, exports more competitive
Methods to increase supply
Training, subsidies, education, machinery
3 areas of supply-side policy
Increase size of labour force, increase productivity, increase efficiency of business
Issues of tight monetary and tight fiscal policy
Conflict of objectives, high consumer and business confidence, output gap ( full employment), inelastic imports
Protectionism
Taxes on imports (tariffs), banning imports (embargo’s), only import a certain amount (quota), increase Uk production(domestic subsidies)
Problems of protectionism
Other countries will retaliate, non-price factors, inflationary issues, WTO rules, loss of efficiency