Topic 3-balance Of Payments Flashcards
Open economy
Trade internationally
Is the UK an open or closed economy?
Trade internationally so our economy is open
Closed economy
Self sufficient trade within a country
Bop (balance of payments)
Is a record of all the external financial transactions between one economy and the rest of the world
Examples of trade in goods/visibles
Raw materials, manufactured goods, cars
Examples of trade in services/invisibles
Banking, insurance, transport
Example of investment income
Profits,dividends and interest on assets abroad
What is X and M
What’s X-M
- X is the revenue earned from selling our exports
- M is our expenditure on Imports
-X-M is the bop ( exports)
Info about strong pound
-buys more money
-makes imports cheaper
-makes exports expensive
M: increases
X: Decreases
X-M: becomes more negative
Deficit increases
Info about weak pound
-Buys less money
-makes imports expensive
-makes exports cheaper
M: decreases
X: Increases
X-M: becomes more positive
Deficit decreases
Reason bop has reduced
- strength of the pound
- strong U.K. Growth
- persistent decline in manufacturing
Equilibrium
Balance in imports and exports
Deficit
When more money is flowing out of an economy than is flowing in
Surplus
When more money is flowing into an economy than out
How can a current account deficit not be a problem?
- If the current account deficit is small and sustainable then it is not a problem because the domestic economy can fund it
- can be a sign of economic growth because economic growth means income and consumers buy more goods
How can a current account deficit be a problem?
- If there is a large and persistent current account deficit, creditors may deem the economy more risky as there is a higher chance of default
- could be a sign of recession (economy is not producing enough exports) or has poor quality goods so low demand for exports
Depreciation
Is when the pound falls in value or is going to fall in value
Causes of a current account surplus
- the currency is too weak relative to other countries
- low rates of inflation relative to other countries
- low wage costs relative to other countries
- low level of growth in a country, making It difficult to buy Imports from abroad and creating a strong incentive for firms in the country to export
Causes of current account deficit
- high rates of inflation relative to other countries
- high wages relative to other countries
- high level of growth, meaning people with higher incomes tend to buy more imports from abroad
Balance of payments
A set of accounts. Showing the transactions conducted between residents of a country and the rest of the world
Exchange rate
The price of the currency in terms of another
Current account transactions
-balance in trades of goods and services
- trade in goods is normally negative
- trade in services is positive flor as the Uk earns strong credits from it financial services
- imports+exports
Current account transactions
-investments
-dividends, profit and interest receipts from UK ownership of oversea assets
Current account transactions
-international transfers
- transfers through government e.g transactions and grants with international organisations
- transfers made or received by private individuals
Bop separated into 3 categories
- capital account
- current account
- financial account
Demand ️and supply diagram
Exchange rate (€ per £)
Quantity of points per period
