Topic 4- Balance of payments Flashcards
1
Q
The balance of payments
A
Is a record of all external financial transactions between one economy and the rest of the world
2
Q
The current account 4 sections
A
- Trade in Goods
- Trade in Services
- Investment Income
- Current Transfers
3
Q
The current account 4 sections:
- Trade in Goods
- Trade in Services
A
- The value of the goods exported minus the value of the goods imported
- The value of services exported minus the value of services imported
4
Q
The current account 4 sections:
- Investment Income
- Current transfers
A
- Income earned from assets owned overseas minus income paid to foreigners for assets owned in the UK (interest on overseas accounts and dividends on shares)
- Payments received from foreign institutions (e.g the EU) minus payments paid abroad (e.g to the EU or food aid to developing countries)
5
Q
Current account deficit
current account surplus
A
- Occurs when the value of goods and services imported is greater than the value of the goods and services exported (more money leaving the economy than entering economy)
- Occurs when the value of goods and services exported is greater than the value of goods and services imported.
6
Q
Does the UK have a current account deficit or surplus
A
- A deficit in its trade in goods
- A surplus in its trade in services
7
Q
5 countries the UK export with most
A
- US
- Germany
- the Netherlands
- Switzerland
- France
8
Q
Countries the UK import from the most
A
- Germany
- China
- Netherlands
- US
- France
9
Q
The capital and Financial account 4 sections
A
- Foreign direct investment (FDI)
- Portfolio Investment in shares and bonds
- Short term capital flows ‘hot money’
- Changes in foreign currency reserves
10
Q
The capital and Financial account:
- Foreign Direct investment
- Portfolio investment in shares and bonds
A
- Investment by foreign companies from abroad into the UK minus investment from UK companies to other countries abroad
- Purchase of UK shares and bonds by foreigners minus purchase of foreign shares and bonds by UK citizens
11
Q
The capital and Financial account:
- Short term capital flows ‘hot money’
- changes in foreign currency reserves
A
- Flows out of the UK to other countries
12
Q
Reasons for the UK’s current account deficit
A
- Relatively low productivity>g&s (exports) are uncompetitive
- Deindustrialization: Relocation of many manufacturing industries from the UK to countries where labour costs are significantly lower. EVAL: labour costs&transport costs have been increasing firms have returned to the UK
- High value of sterling>loss of competitiveness
- UK has a high marginal prosperity to import and therefore the continuous economics growth between 1992-2008 contributed to the deficit
- EU recession meant that there were no significant improvements when there was a 27% depreciation in the value of sterling in 2008-09
13
Q
Reasons for UK current account deficit
A
- Low Productivity
- Deindustrialization
- high value of sterling
- High marginal prosperity
- EU recession
14
Q
Significance of a current account deficit
if it if persistence it may be undesirable because…
A
- It suggests exports are uncompetitive and relying on consumer spending>lower growth in export sector
- may result in an increasing rate of unemployment (jobs in export sector decrease)
- country may be forced to borrow
- floating exchange rates>depreciation of exchange rate
- loss of confidence by foreign investors>risk that investors will remove their investments>fall in value of countries currency (devaluation)>decline in living standards&lower confidence for investment
15
Q
How can a current account deficit not be a problem (explanations)
A
- if it is caused by imports of capital goods
- if it occurs during a period of inward investment (surplus on financial account)>can create jobs&investment ) e.g US had a deficit as they borrowed money to invest into its economy>enabled higher growth&paid back debts>Other countries had confidence in US to lend money
- If it is only a short term problem
- indicate a strong economy which is growing rapidly
