Balance of Payments Flashcards
What are the three components of the BoP?
Current Account:
- the exports of goods and services, the import of goods and services, and net income and current transfers
Capital Account:
- net capital transters and transactions in non-produced, non financial assets
Financial Account:
- net direct investment, portfolio investment and reserve assets
The current account
What are current transfers?
What does income include?
Current transfers:
- inflows into a country due to transfers from a broad, including gifts, foreign aid and pensions, minus the outflows of these transfers domestically to foreign countries
Income:
- all inflows of wages, rents, profit and interest from abroad, minus all outflows of WRPI to other countries
How do you describe money flowing into the country?
How do you describe money flowing out of the country?
inflows are known as credit items, as they represent the goods and services which are being exported (we get money in return for exports)
outflows are known as debit items, as they represent the goods and services being imported (we have to pay for these goods/services)
Explain what capital transfers and non-produced, non-financial assets are in the capital account
Capital transfers:
debt forgiveness, grants, insurance payouts
non-produced, non-financial assets:
- natural resources - land, fishing rights, water, airspace
- may be used in the production of goods and services
What are the causes of a CA deficit?
Overspending
- spending too much on goods and services, by the govt, consumers and firms (link to rapid economic growth)
Overvalued exchange rate:
- SPICED - imports cheaper, exports dearer
lack of competitiveness:
- indicative of supply side reforms needed, as exports are not competitive internationally
rapid economic growth:
- capital goods more expensive than consumer goods
- may be a good thing, as although will have a CA deficit in the SR, this should be resolved in the LR, as imports of capital can be used to increase exports
large inflows of FDI - people want to invest in the UK
- huge demand for domestic currency
- increases price of currency
- currency appreciates
- SPICED
What are the causes of a CA surplus?
Highly competitive:
- higher productivity means that internal prices are lower, therefore exports will be more competitive
High savings rate:
- decreased spending on imports
Undervalued exchange rate:
TWE should a govt be concerned with a persistent current account deficit?
Why might a current account deficit be bad?
Why might a CA deficit be good?
