Balance of Payments Flashcards
(21 cards)
Balance of payments
Financial record of all the transactions between one country and the rest of the world
Credit
Exports
Inflow of money into the country
e.g. UK selling cars to the US
Debit
Imports
Outflow of money from the country
e.g. UK consumer buying a car from the US
Current account
Movement of all goods and services into and out of the UK
Also primary and secondary income
Trade in goods + trade in services + investment income (primary income) + current transfers (secondary income)
Financial account
Transactions associated with changes of ownership of the UK’s foreign financial assets and liabilities
FDI + portfolio investment + short term capital flows + foreign currency reserves
Capital account
Capital transfers, including government investment grants and acquisition / disposal of non-financial, non-produced assets
e.g. patents, trademarks and land for foreign embassies
Capital transfers + debt forgiveness + exchange of non-produced, non-financial assets
What the current account is made up of
Trade balance in goods
Trade balance in services
Net investment income from overseas assets
Net money transfers
Trade balance in goods
Measure of revenue received from the exports of physical goods less the expenditure on the imports of physical goods
Finished manufactured goods, components, raw materials
Energy products, capital technology
Trade balance in services
Measure of revenue received from the exports of services less the expenditure on the imports of services
Banking, insurance, consultancy
Tourism, transport, logistics
Shipping, education, health
Research, cultural arts
Net investment income from overseas assets
Profits, interest and dividends from investments in other counties
e.g profits from transnational businesses
Net money transfers
Secondary income represents the provision of an economic value by one party without directly receiving a counterpart item of economic value
Overseas aid / debt relief
Private money transfers e.g. from migrants
UK figures
trade in goods (visible trade account) - consistently in deficit: -6.9% of GDP (2023)
trade in services (invisible trade account) - consistently in surplus: 6.3% of GDP (2023)
primary income balance - was positive in 2000s then very negative in 2010s but is now fluctuating
secondary income balance - consistently negative but less significant than primary
UK trade
Main partners: Germany, US, China, Netherlands, France
Main goods exported and imported: cars, machinery, medicinal products
Main services exported and imported: finance, insurance
Costs of a fall in exports
Negative impact on AD causing a fall in national output so might trigger economic slowdown or recession
Negative effect on company profits and business confidence with less demand implying less capital investment so can lead to plant closures, job losses, cyclical unemployment
Government finances affected as slower growth hits tax revenues
Some industries are more dependant on exports than others which might worsen ‘north-south divide’
Trade deficit cycle
UK exports decrease and imports increase
Demand for the pound falls and supply increases
Exchange rate depreciates
UK exports become cheaper
UK exports increase, stimulating demand for pound
Exchange rate appreciates
Does trade deficit matter
In the SR, no
However, in the LR, yes
Deficit has to be funded by a surplus in financial account → government has to borrow from overseas → country becomes less wealthy, as less income is going round the circular flow of income (more withdrawals in form of imports)
Continual downward pressure on the £ → exports cheaper but imports more expensive → import inflation (cost-push inflation) so increased cost of raw materials → decrease in AS
What causes a current account surplus
Mainly determined by the value of UK exports and imports
What effects the value of UK exports
Level and growth of consumers’ incomes and spending in foreign countries: increased GDP in US → increased income in US → increased consumption → purchases of UK exports
Value of the £ against foreign currencies: £ depreciates against $ → price of UK goods in US drops (more price competitive) → more UK exports to US
Price competitiveness of UK products compared to foreign products: UK inflation < Eurozone inflation → UK products become relatively cheaper → UK exports rise
Non-price competitiveness of UK UK products compared to foreign products: Quality of UK products improves relative to foreign products → increased UK exports
What affects the value of UK imports
Level and growth of consumers’ incomes and spending in the UK: decreased GDP in UK → decreased incomes in UK → lower consumption → decreased imports
Value of the £ against foreign currencies: £ depreciates against $ → increased price of European goods (UK more price competitive) → decreased imports from Europe
Price competitiveness of UK products compared to foreign products: UK inflation < Eurozone inflation → UK products become relatively cheaper → decreased imports
Non-price competitiveness of UK UK products compared to foreign products: If quality of UK products improves relative to foreign products → decreased imports
How governments can solve a large balance of payments current account deficit
(Expenditure switching)
Depreciation of exchange rate (QE or supply-side policies)
Export subsidies
Import tariffs
Policies to lower the rate of inflation in the home economy
How governments can solve a large balance of payments current account deficit
(Expenditure reducing)
Higher taxation
Fall in government spending
Rise in interest rates or a fall in the availability of credit
