Balance Of Payments Flashcards
(25 cards)
What is the balance of payments?
A record of the transactions conducted between residents of a country and the the rest of the world
What are the components of the balance of payments?
Current account, capital account, financial account and net errors and omissions
What country’s are most affected by the balance of payments?
The more integrated a country is into the global market, the greater impact of global transactions
What is the current account?
The transactions in physical goods and services
What are the components of the current account?
Trade in goods
Trade in services
Primary income
Secondary income
What is the trade of goods?
Physical/visible products
What is the trade in services?
Invisible/ intangible products
What is primary income?
Income from investment abroad
What is secondary income?
Transactions between governments, net transfers
What is the capital account?
Smallest account
Transfer of fixed assists or those which have no transactions e.g inheritance tax
What is the financial account?
Transactions associated with changes in ownership of assets and liabilities
What does the financial account consist of?
Foreign direct investment
Portfolio investment
Purchase or sales of other financial assets
Reserve assets
What is portfolio investment?
Buying of bonds or shares of foreign companies
What are reserve assets?
Currency that flows from the bank, “hot” money flows
What is the policy objective of sustainable balances?
What causes imbalance on the balance of payments?
Changes in economic activity (alter trade)
Exchange rate influence of the value of goods and services
Economic shocks and rate of growth influence by demand
Inflation affects price competitiveness
International competitiveness- determined by factor input costs
Developing countries reliant of primary sector
What do the causes of imbalances depend on?
Structure of the economy
Significance of international trade
Component of AD function
What are the consequences on imbalance of the balance of payments?
Unemployment rise in exporting industries(structural)
AD decrease of international dimension of AD function diminished
SR-possible to finance by selling assets or borrowing
Risk British ownership of assets may be lost
What do the consequences of imbalances depend on?
How reliant on international trade
How open the economy is
How integrated into international market
How flexible to respond to electric shock
What is the J-curve effect?
Reduction in value of currency will initially increase a current account deficit before it reduces it
What is the Marshall-Lerner effect?
A devaluation or depreciation will only improve a current account position if elasticity over 1
What are the two way of correcting an imbalance?
Internal devaluation
Exchange rate devaluation
What is internal devaluation?
A way of correcting an imbalance
An expenditure reducing policy of reducing level of AD by raising level of taxation
Results is lower GDP, higher unemployment, lack of competitiveness and nominal wages to be ‘sticky’
What is exchange rate devaluation?
A way of correcting an imbalance
Intervention in foreign exchange markets by reducing rate of interest to create a currency depreciation , it restores competitiveness
