4.1.7 Balance of payments Flashcards
(22 cards)
What is the balance of payments
a record of all a countries financial dealings with the rest of the world over a course of a year including the current account the capital account and the financial account
What are the elements of the current account
Balance of trade- exports-imports
Primary income- income from uk assets overseas minus foreign assets here
Secondary income- transfers between governments usually aid and remittances
Current account imbalances
Deficit- money leaving exceeds money coming in
Surplus- money coming in exceeds money leaving
The UK CA
Trade in goods- deficit
Trade in services- surplus
Primary income- deficit
Secondary income- deficit
The capital account
Transactions in fixed assets, usually to do with migration
The financial account
Changes of ownership of financial assets and liabilities
direct investment- e.g FDI flows
portfolio investment- e.g equities and debt
financial derivatives- e.g financial instruments
reserve assets- e.g foreign financial assets controlled by UK monetary policies
How does the UK fund deficits
-Attract foreign investment through TNCs
-Sell assets to foreigners
-Borrow from aboard through issuing of gov bonds
Whats the difference between structural and cyclical deficit
S- persistent deficit caused by lack of competitiveness
C- short term caused by the business cycle
What are the cyclical factors causing a short run deficit
Low levels of saving- high imports (usually during boom)
Over valued exchange rate- expensive exports
Recession in export market
Fall in global prices of exports
What are the structural factors causing a long run deficit
Underinvestment- low productivity
High inflation- high export prices
Inadequate R+D- poor quality exports
Lower cost competition
What are the problems with a CA deficit
Falling employment
Falling GDP
Capital account surplus
Positive of CA deficit
Short term higher living standards due to high consumption
Problems are dependent on the type of deficit and if we are under a floating exchange rate deficit will self correct
What are the problems with a CA surplus
Domestic consumption is sacrificed
One countries surplus is another countries deficit
Will cause appreciation and a deficit eventually
How to cure a CA deficit
Exchange rate policy
Expenditure reducing
Expenditure switching
Supply side policies
How exchange rate policy cures a defict
Devaluation should lead to a rise in exports
How expenditure reducing cures a deficit
deflationary policies reduce spending on imports
How expenditure switching cures a deficit
Protectionism encourage people to change to domestic goods
How supply side policies cure a deficit
Improve competitiveness
How deficits are self correcting
under a floating exchange rate system, domestic currency is sold to buy imports causing a depreciation which would reduce price of exports
What are global imbalances
large CA surpluses and deficits
What are the problems with global imbalances
Debt can lead to financial crises
Countries with fixed exchange rates cant fix deficits
Why global imbalances aren’t a problem
Global imbalances will self correct
Countries are dependent on each other so cant afford political problems
