4.1.7 Balance of Payments Flashcards
(29 cards)
What are the components of the balance of payments?
Current account
Capital and Financial account
What is the current account?
Payments for the purchase and sale of goods and services are recorded
What is the capital account?
Records capital transfers and transactions in non-produced assets and non-financial assets
What is the financial account?
Records financial assets and liabilities
Split into FDI, portfolio investment, and other investment
What is FDI?
Long term investment from one country into firms in another country by using control or higher influence
What is portfolio investment?
Short term flows of money to purchase foreign shares
Investment in financial assets without having control
What else is included in other investment?
Range of short and long term financial flows which cannot be classified as either FDI or portfolio
What are the causes of deficits on the current account?
High amount of imports compared to exports
Higher consumers spending on foreign goods
Higher income outflows
Strong domestic currency
Low competitiveness of domestic industries
What are the causes of a surplus on the current account?
High amount of exports compared to imports
Low domestic consumption
Higher saving rates
Large inflow of income due to foreign investment
Weak domestic currency
Competitive domestic industry
What measures does a country have to reduce imbalances on the current account?
Exchange rate changes
Deflationary policies
Supply side policies
Protectionism
Currency controls
What exchange rate changes resolve current account imbalances?
Depreciation reduces deficit
Appreciation reduces surplus
What are the deflationary policies used to resolve current account imbalances?
Higher interest rates
Tighter credit conditions
Higher taxes
Lower government spending
These reduce deficits
What are the negatives of deflationary policies?
Increase cyclical unemployment
Greater recessive conditions
Lower profit for firms
What supply-side policies resolve a current account imbalance?
Investment in education and training
Tax cuts for firms
Privatisation
Deregulation
Investment in infrastructure
Support for research and development
How do supply-side policies resolve current account imbalances?
Governments can increase productive capacity increasing export competitiveness and reducing reliance on imports correcting deficits
What protectionist policies correct imbalances in the current account?
Tariffs
Import quotas
Subsidies
Administrative barriers
How does protectionism resolve current account imbalances?
Restriction of international trade to protect domestic industries from foreign competition can reduce deficits
What are the negatives of supply-side policies?
Inflation
Time lag
Income inequality
Negative environmental consequences
Opportunity cost
What are the negatives of protectionist policies?
Retaliation form other countries
Higher prices for consumers
Reduced choice in the long run
What currency controls correct current account imbalances?
Limit access to foreign currency
Restrict capital outflows
Reduce demand for foreign currency
Discourage spending on foreign products
How do currency controls correct current account imbalances?
Fewer imports and a more stable currency reduces a deficit/grows a surplus, helping to improve the country’s external balance
What are the negatives of currency controls?
Discourage foreign investment
Black markets for currencies
What are current account imbalances?
Differences between a country’s exports and imports of goods/services, income, and transfers
Shows if a country is a net lender or borrower
What is the NIIP?
Net international investment position is the difference between foreign assets owned and foreign liabilities owed
