Unit 4: Balance of Payments Flashcards
What is meant by ‘Balance of Payments’?
A record of all a country’s financial dealings with the
rest of the world over the course of a year.
What does the BoP Structure the look like?
Current account
Capital account
Financial account
International investment position
What does the Current Account consist of?
- Balance of trade in goods, and balance of trade in services (MAINLY)
- Net Primary Income
- Net Secondary Income
What does the Financial Account consist of?
Transactions that result in a change of ownership of financial assets and liabilities between UK residents and non-residents
Direct Investment:
Capital provided to/ received from, an enterprise, by an investor in another country
Portfolio Investment:
Investments in equities and debt securities
Also includes Financial Derivatives and Reserve Assets
What is the Capital Account?
Sale/transfer of patents (the right to produce a good), copyrights, franchises, leases and other transferable contracts + goodwill
Transfers of ownership of fixed assets
What are the types of Balance of Payments Policies?
Expenditure Switching Policies
Expenditure Reducing Polices
Supply Side Policies
How do ‘Economic Policies to reduce a trade gap/ current account deficit’ work in terms of Balance of Payments?
These are corrective policies for BOP to normally focus on
What are Expenditure Switching Policies?
Policies to make the Price of Imports Rise, or the price of UK goods to fall
- Protectionist policies- e.g. tariffs, quotas or subsidies to domestic producers
Problem: Illegal under WTO rules - Devaluation/Depreciation of the exchange rate
Problem: You don’t interfere in the exchange rate market, if you have a floating exchange rate
E: Revaluation- causing exports to also fall so that the current account deficit won’t be corrected
What are Expenditure Reducing Policies?
Policies that aim to Reduce the Spending Power of Consumers
- Deflationary Fiscal Policy:
Reducing AD either be decreasing gov. spending or by increasing taxes - Deflationary Monetary Policy:
Increasing interest rates
Problem: Most counties have independent central banks, which control inflation, but not the exchange rate
E: Spending on domestic goods decrease, increasing unemployment and reducing economic growth
How do Supply Side Policies help with Balance of Payments?
Policies designed to Increase Productivity and Competition. These help improve international competitiveness, increasing exports.
Goods are made competitiveness through:
- Increase in Education + Training
- Tax breaks + investment allowances to stimulate purchase of capital equipment
- Tax breaks + investment allowances, to stimulate purchase of capital equipment
- Privatisation, deregulation + contracting out of public services
E: Opportunity Cost
What are the Negative Effects of a Trade deficit on the economy?
Negative Impact on AD
- Fall in real GDP/ output, negative multiplier effect
- Economic slowdown/recession
- Negative output gap
Negative effect on Company Profits + Business Confidence
- Fall in demand - fall in capital investment
- Plant closures/ job losses - cyclical unemployment
- Fall in tax revenues, rise in benefits
- Could worsen North/South divide
What are the Positive Effects of a Trade deficit on the economy?
Higher Standard of Living
Better quality goods
What are the Negative Effects of a Trade surplus on the economy?
Inflationary pressure, because exports/injections are high in relation to imports/leakages
Increase in the value of the £ - fall in international competitiveness
Living standards may fall if the surplus was caused by higher exports, resulting in less goods available for domestic consumers
What are the Positive Effects of a Trade surplus on the economy?
Increase in International Competitiveness
Greater confidence in UK economy
Greater FDI
What is Net Primary Income?
Includes money from interests, profits, dividends generated from foreign investment, migrant remittances
