Y12 Booklet 3: Balance of Payments & Exchange Rates Flashcards
What is an exchange rate?
the price/value of a currency, in terms of another
What is an import?
a good produced abroad, and bought in the UK
What is an export?
a good produced in the UK, and sold abroad
What must be done, before purchasing a foreign good?
exchange currency into foreign currency
What is the “Pattern of Trade”?
the history/tendency of where a country imports from and exports to
What makes up the “Balance of Payments”?
- current account
- capital account
- financial account
What is the current account?
an account of a country’s imports and exports
What 4 components comprise the current account?
1) trade of goods
2) trade of services
3) primary income
4) secondary income
What is “primary income” in the current account?
money earnt abroad and sent back to the UK
What is “secondary income” in the current account?
government transfer payments, e.g. financial aid
What is a “current account deficit”?
when currency outflow exceeds inflows
What is a “current account surplus”?
when currency inflows exceeds outflows
What is it called when a currency’s value increases? (relative to another currency)
strengthening/appreciating
What is it called when a currency’s value decreases? (relative to another currency)
weakening/depreciating
What happens to trade when a currency strengthens?
SPICED
imports = cheaper
exports = dearer
What happens to trade when a currency weakens?
WPIDEC
imports = dearer
exports = cheaper
Who purchases currencies? (e.g. GBP)
- foreign firms importing from UK
- foreign investors in UK (affects AD+LRAS)
- currency speculators
- tourists entering/leaving country
- central banks (to control inflation)
Who sells currencies? (e.g. GBP)
- UK firms importing from abroad
- UK investors abroad (affects AD+LRAS)
- currency speculators
- tourists entering/leaving country
- central banks (to control inflation)
What is the MPM?
Marginal Propensity to Import
the likelihood that an increase in income will be spent on foreign imports
What causes the exchange rate to change? Example of Euros?
relative supply and demand of a currency
1) a UK consumer wants to buy French champagne
2) consumer sells GBP (D falls) to buy EUR (D rises)
3) demand curve for EUR shifts right
4) excess demand, supply extends
5) price of EUR rises relative to GBP
What does a change in exchange rates cause, in relation to trade? Example?
change in international competitiveness
1) EUR strengthens, buying EUR = more expensive
2) so, more expensive to buy EU goods
3) UK firms less incentivised to buy from EU
Pros and Cons of a Current Account Deficit?
+ goods often cheaper to produce abroad, so lower prices, causing consumer surplus & utility
– domestic demand is lower, less incentive to produce so output falls, causes demand-deficient unemployment
How can inflation affect international trade?
countries with lower inflation sell cheaper goods, so are more attractive, so more internationally competitive
countries with higher inflation sell more expensive goods, so are less attractive, so less internationally competitive
What is “invisible trade”?
trade of services
Since when has the UK had a trade deficit every quarter?
1999
