2.1.4: Balance of Payments Flashcards
What is the balance of payments?
A record of all the transactions between a country and the rest of the world
What are the components of the balance of payment?
- The current account
- The capital account
-The financial account.
What is the current account?
- A record of a country’s imports and exports, foreign investment and transfers such as foreign aid
How is the current account spilt?
- Between the trade in goods and the trade in services
What is the trade in goods?
- Known as visibles
- Traded goods either raw materials and finished goods
How do we get the balance of trade?
- It is the difference between visible exports and visible imports
What is the trade in services?
- Known as invisibles
- These are services traded in or out of the country.
What is a current account deficit?
Where imports are greater than exports
- making the current balance is negative
What is a current account surplus?
Where exports are greater than imports, so the current balance is positive
How do we get the current balance?
Balance of Trade + Balance of Invisibles + Net income and current transfers.
How does high inflation cause an imbalance in the current account?
It causes menu costs for businesses and firms to be higher, which means they will produce less, reducing competitiveness and exporting
How do changes in the exchange rate cause an imbalance in the current account?
Affect how much we export
- A stronger domestic currency hampers exports and makes imports cheaper
- But a weaker domestic currency stimulates exports and makes imports more expensive.
What are some of the relationships between current account imbalances and economic objectives?
- More exports, leads to greater inflow, which leads to an increase in AD, leading to ECONOMIC GROWTH
- Expensive imports of raw materials could lead to cost push inflation in the UK since firms face higher production costs.
