Topic 3.4 The balance of payments on current accounts Flashcards
Balance of payments
This is a record of all of the country’s trade/transactions with the rest of the world.
3 sections of the balance of payments
1) The Current Account
- Trade in goods
- Trade in services
- Primary income
- Secondary income
2) The Financial account
3) The Capital account
The first one is the largest component of the balance of payments and we only need to know that for the exam.
Current account Surplus
A surplus is when the sum of the value of exports of goods, services, primary and secondary income are greater than the sum of the value of imports.
Current account Deficit
A deficit is when the sum of the values of exports of goods, services, primary and secondary income are less than the sum of the value of imports.
Budget deficit
The difference between government revenues and government spending (not current account deficit)
The Trade in Goods
The Trade in Goods measures the net exports (X - M) of visible goods
The UK has a large deficit due to shift in tertiary sector
The Trade in Services
The Trade in Services measures the net exports (X - M) of invisible items e.g banking, insurance and tourism
The UK has a large surplus due to shift in tertiary (services) sector.
Primary income
Primary income is the net flow of profits, interest and dividends from investments in other countries and net remittance flows from migrant workers
Secondary income
Secondary income are transfers between residents of different countries - nothing of economic value has been exchanged such as financial gifts or development aid.
Factors that influence current account
1) Controlling consumer spending (lowers imports BUT less AD)
2) Invest in supply-side policies (more productive, therefore more exports BUT time, cost)
3) Depreciation of the exchange rate (makes exports look cheaper BUT increases price of imports which is problematic if we need those resources). Occurs from inflation
4) Economic activity in other countries
