4.1.7 Balance of Payments Flashcards
(35 cards)
What is the Balance of Payments?
A comprehensive record of all financial transactions between residents of a country and the rest of the world during a specific period.
What does the Balance of Payments include? (3)
- Trade in goods and services
- Investment income flow
- Financial Transfers
What is the Balance of Payments made up of? (3)
- Current Account
- Capital Account
- Financial Account
What is the Current Account?
Day-to-day trade and income
What is the Capital Account?
A smaller part of the BoP that records asset transfers like patents, debt forgiveness, and inheritance payments across countries.
What is the Financial Account?
A large part of the BoP which records investment flows and changes in financial ownership.
What happens if the BoP is not in balance? (3)
- Currency Volatility
- Economic Stress
- Long-term Structural challenges
What are the key components of the Current Account? (4)
- Trade in Goods
- Trade in Services
- Net Primary Income
- Net Secondary Income
What are the key components of the Financial Account?
- FDI
- Portfolio Investments
- Banking Flows
- Foreign Reserves
What is FDI?
Foreign Direct Investment, Long-term investment in businesses or infrastructure.
What is Portfolio Investment?
Buying stocks and bonds.
What are Banking Flows?
Movements of “hot money” into or out of UK bank accounts based on interest rates or investor confidence.
What are Foreign Reserves?
The buying/selling of foreign currency or gold by the Bank of England.
What is a Current Account deficit?
Occurs when imports and payments going out of a country exceed the money coming into it.
What are reasons for a Current Account deficit?
- Short-term - Cyclical
- Long-term- Structural
What is a cyclical, short-term Current Account deficit? (4)
- A strong domestic economy increases demand for imports
- Recession in key trading partners reduces export demand
- A strong currency makes exports more expensive and imports cheaper
- Volatile global commodity prices can raise import costs or reduce export earnings
What is a structural long-term Current Account deficit? (3)
- Low productivity and high unit labour costs hurt competitiveness
- Insufficient investment in capital or innovation limits export growth
- Low national savings mean more reliance on foreign capital
What downsides are there to running a persistent deficit? (4)
- It lowers AD, slowing real GDP growth and raising unemployment
- It can cause the currency to depreciate, which makes imports more expensive- leading to inflation
- Countries may borrow to finance the deficit, increasing external debt
- If investors lose confidence, capital may leave the country quickly, causing crisis
What is a BoP surplus?
The country earning more than exports and overseas income than it is spending on imports and payment abroad.
What are reasons for a BoP surplus? (4)
- Households and firms saving more than they invest- leaving more capital available for export-related production
- Competitive industries generating export surpluses
- High world prices for key exports, like oil or gas
- Countries like Norway or Singapore run surpluses and invest the proceeds in overseas assets
What are policies that can be used to correct the BoP deficit? (3)
- Depreciating the currency
- Import Tariffs
- Low inflation
What can be an issue with depreciating the currency?
Could lead to cost-push inflation
What could be an issue with low inflation?
Deflation risks reduced investment and economic stagnation.
What are policies that can be used to reduce overall domestic spending? (2)
- Higher income taxes reduce disposable income and therefore import demand
- Cuts in government spending reduce aggregate demand, encouraged firms to export unused capacity
