Balance of payments Flashcards
(30 cards)
What does the balance of payments measure?
Inflows and outflows of money within a country
What three things make up the balance of payments?
- Capital account
- Financial account
- Current account
Examples of what is measured in the financial account
- Portfolio investment
- Foreign direct investment
- Reserves held in currency or gold
What is portfolio investment?
buying and selling of financial assets eg. bonds/shares/derivatives - can be inflow OR outflow depending on country purchased
What is measured within the capital account?
- Debt forgiveness
- Inheritance taxes
- Sale of tangible/intangible assets
- Death duties
Provide an example of balance of payments
USA import high but export little therefore have a current account deficit
HOWEVER their financial account is in a surplus due to stable, high volume investment
THEREFORE their balance of payments is balanced
What is measured in the current account?
- Trade in goods - trade balance
- Trade in services - trade balance
- Income eg.remittances
- Transfers eg EU fees or contribution to aid
What is remittances
The part of the earnings which a migrant worker sends back to family members in the country of origin.
3 policies which might address a current account deficit?
- Encourage export growth
- Encourage foreign investment
- Encourage high level education
The UK ran a Current Account deficit for between January 2018 to December 2023. List 3 reasons why this might be the case?
- They have a strong financial sector to balance payments
- Imports may be very cheap from other countries
- The UK may lack skill that other countries have and use in production
What does a current account deficit mean?
The UK is importing more goods, services, and investments than it’s exporting
What is measured and not measured regarding the current account?
QUANTITY IS NOT MEASURED - VALUE IS MEASURED
If the overall current account is negative, what would the term be?
Current account deficit
If the overall current account is positive, what would the term be?
Current account surplus
What are death duties?
Tax placed on value of inherited assets
What is it in regards to balance of payments if us firm purchases uk gov bonds?
inflow
what does a current account deficit essentially mean?
buying more than rest of world that selling to rest of the world
Example of credit foreign direct investment?
German firms decide to setup factory/shops in Uk
Example of debit foreign direct investment?
Uk firms decide to setup factory/shops in Germany
What is the smallest part of the balance of payments?
capital account
What is a current account deficit not?
sustainable
If the current account is in a deficit, this is not sustainable. How can you balance this?
financial account surplus
China runs a current account surplus. How may this lead to countries like the US having a financial account surplus?
Portfolio investment
China has spare cash therefore they can invest
particularly in countries with good, safe returns
this may mean purchasing US gov bonds which leads to a FA surplus
What does current account measure?
measures trade
