balance of payments Flashcards
(21 cards)
what is the balance of payment
a record of transactions between one economy and the rest of the world
what is the balance of payments made up of
current account, capital accounts, financial account, net errors and omissions.
what the tje current account made of
trade in goods, trade in services, primary income
ok balance of payments
uk had a large defecit in trade in goods. small surplus in trade in services. overall deficit.
what is primary income
employment income from abroad,
earnings from past investments made abroad by uk citizens. earnings from direct investment. earnings from bonds and securities.
what is secondary income
current transfers and remittances, foreign aid.
demand side causes of a current account deficit
lots of raw materials imported, high exchange rate, recession abroad, strong domestic growth,
supply side causes of a current account deficit
recourses becoming depleted
lack of international price or quality competitiveness
low investiment, productivity, high unit labour costs
consequences of a current account deficit
usually means trade balance is negative shifting AD left
spending more than receiving means’s the country can’t afford its lifestyle and must finance it by borrowing, over time inversions are discouraged and move money elsewhere, causing currency crisis
demand side causes of a current account surplus
high incomes abroad
low incomes at home
weak exchange rate
supply side causes of a current account surplus
competitive exports
how might a current account surplus link to a recession
domestic incomes are low so firms can’t sell domestically, so compete more vigorously internationally
consequences of a current account surplus
trade balance usually negative so shifts AD left
if exports are greater than imports there is more demand for currency than supply of it, raising the exchange rate
how can the government correct balance of payments
tariffs
quotas
high interest rates
devaluation of currency
subsidies
embargoes
supply side policy
what’s a tariffs
raises price of imports, by placing a tax on imports
what’s a quota
limitation on number of imports
what are supply side policies that would correct a deficit on the balance of payments
anything shifting lras to the right reduces average price
what is devaluations of currency
making the £ weaker
what is an embargo
a total ban of imports of a specific product or from a specific country
what is the biggest section of the balance of payments
current account
what does the capital and financial account measure
transfer of the ownership of fixed assets
investment (initial investment, returns shown on current account)
