BALANCE OF PAYMENTS Flashcards
What is the Balance of Payments?
A record of all financial transactions taking place between the UK and the Rest Of The World
3 Sections of the Balance of Payments
- Capital Account
- Financial Account
- Current Account (MAIN ONE)
Components of the Current Account
- Trade in Goods
- Trade in Services
- Primary Income (Investment Income)
- Secondary Income (Current Transfers)
Trade in Goods and Services
Measures the Imports and Exports of goods and services in an economy; AKA The Trade Balance
Primary Income (Investment Income)
- Refers to the inflow and outflow of money made on investments outside of the UK by UK firms/investors and money made on investments in the UK by foreign firms/investors
Secondary Income (Current Transfers)
- When money is transferred abroad without getting any goods or services back in exchange.
- Usually in the form of Remittances (money sent in and out of a country to family elsewhere) and Foreign Aid
Factors affecting Current Account (List 4)
- Domestic Growth
- Exchange Rate
- Relative Inflation Rate
- Protectionism
- Recession overseas
- Quality
- Productivity and Costs
How does Domestic Growth affect the Current Account?
- High levels of domestic growth will see increased income levels and living standards
- This will make people more likely to import high quality goods from abroad
- Increased Imports and a worsening current account deficit
- Opposite is also true
How do Recessions Overseas affect the Current Account?
- Recessions overseas will see the income levels abroad decrease and decrease the demand for the country’s exports
- This decreases the Export revenue in the country and would worsen a current account deficit
How does Exchange Rate affect the Current Account?
- SPICEE and WPIEEC
- Decreased Exchanged Rate will make Exports more internationally competitive and Imports more expensive; increasing X and decreasing M which improves Current Account
- Increased Exchange Rate will make Exports less internationally competitive and Imports cheaper; increasing M and decreasing X which worsens Current Account
How does Relative Inflation Rate affect the Current Account?
- The lower a country’s Inflation Rate is relative to its competitors, the more likely it is consumers will demand the exports from that country; increasing X and improving Current Account
How does Quality affect the Current Account?
- The higher the quality of goods and services in a country, the higher the demand for their exports
- Increases X and improves Current Account
How do Productivity and Costs affect the Current Account?
- The more productive a country is in production and the lower the cost per unit of labour, the more competitive the country’s exports will be
- Increases X and improves Current Account
How does Protectionism affect the Current Account?
- When a country imposes Protectionist policies, this will decrease the demand for and expenditure on Imports in that country, improving the Current Account
- Example - USA 30% Washing Machine Tariff would’ve seen cost of imports increase, decreasing the imports into the USA
Consequences of Current Account Deficit
- Likely to decrease AD (Left Shift) - lower Economic Growth and increased Cyclical Unemployment
- Can put downwards pressure on Exchange Rate as more imports in a country increases the Supply of Currency (Right Shift)
-Eval. - Could mean self-correcting CA deficit BUT Deficit could be a sign of low competitiveness in Exports so lower ER wouldn’t correct Deficit but instead cause ‘STAGFLATION’ (Increase in Cost of Production to firms due to increased import prices of raw materials; would see Inflation and reduced Growth at same time)
