Current Account Flashcards
Current account deficit
When more money is leaving the UK than entering it
Current account contains:
Trade in goods
Trade in services
Income
Transfers
Trade in goods
They are visible and tangible
1992- deficit- lack of raw materials- oil- spends more on imports than exports
Cars, food chemicals
Trade in services
They are invisible and intangible
Surplus caused by London
Banning and financial advice and tourism, high levels of technology
Income
Mainly dividend payments on stocks and shares
Investment makes money
Usually a surplus
Transfers
Money sent out of the UK by foreigners working in the UK to relations abroad
Can be international trade
Works the other way around
Causes of a deficit on the current account
Occurs when a country’s inhabitants have spent more on goods and services from abroad than overseas residents have spent on the country’s products
OR
Because there has been a net overflow of investment income
If incomes are falling abroad, demand for the country’s exports will fall.
A rise in incomes at home will also contribute to a deficit as people will increase their spending on imports
A rise in the exchange rate may also result in a deficit, as if will raise export prices and also lower import prices
An outflow of investment income will occur if the investments that foreign reducing a have made in the country earn more than investments the country’s inhabitants have made in other countries
Causes of a surplus of the current account
Occurs when a country’s revenue from abroad is greater than its expenditure abroad
This can happen when revenue from exports exceeds expenditure on imports or because the country is a net earner of investment income
A surplus is likely to occur if a country’s products aye of a high quality, are produced at a low cost as reflect what households and firms antIf and at home want to buy
A fall in the exchange rate can also give rise to a surplus as a reduction in the value of the currency lowers export prices and increases import prices
A recession can also give rise to a surplus as a country’s inhabitants may cut back on buying products including imports, forcing firms to focus on competing in export markets
Consequences of a deficit
A country is consuming more than producing But, extra income is going abroad Aggregate demand will fall Unemployment will increase Price levels will fall May lead to a fall in the exchange rate Country's debt will increase
Consequences of a surplus
A country is consuming less than producing
This leads to a net inflow of income
Banks will have more money and increase lending
Rise in surplus means that next exports increase
Exchange rate will appreciate
Current account surplus
When more money is entering the country than leaving it
