Lesson 5 - The Balance Of Payments Flashcards
(18 cards)
What are the 3 parts of the BoP?
- Current account
- Financial account
- Capital account
What are the factors indicating international competitiveness?
- balance of trade
- productivity
- growth
- unit labour costs
The financial account
Flows of investment in and out of the country (e.g FDI, TNC’s)
What is FDI?
Investment in the productive capacity of a firm in another country
What are the benefits of FDI?
- economic growth
- jobs, so falling unemployment
- increase in skill levels
- paying taxes
- boosts LRAS
What are long term capital flows?
Money invested into a country for the long term (e.g FDI)
What are portfolio capital flows?
The purchase of financial assets (bonds and shares), and people can buy bonds and shares from global markets as a result of globalisation
What are short term capital flows?
Hot money flowing in and out of the economy as a result of exchange rates/interest rates
The current account
- trade in goods
- trade in services
- profit from investments
- current transfers (e.g foreign aid)
Reasons for a current account deficit
- strong pound (higher prices)
- inflation (higher prices)
- productivity (affects costs)
- fluctuating incomes/demand abroad
- rising incomes at home (more disposable income to spend on imports)
What are the consequences of a current account deficit in the short run?
- Does not pose a problem
- livings standards may increase short term since imports are cheaper
What are the consequences of a current account deficit in the long run?
- sign of a lack of competitiveness
- declining domestic industries mean that living standards will fall
What are the solutions to a current account deficit?
- expenditure switching policies (protectionism)
- expenditure reducing policies (contractionary policies)
- weaken the exchange rate to make exports cheaper
The impact of a fall in the exchange rate depends on…
Elasticities of demand
Does weakening the currency actually work?
- may worsen the BoP deficit in the short run, since it takes time to respond to price changes
- demand will be more elastic in the long run
What is the real solution for a BoP deficit?
Supply side policies
- subsidies
- lower corporation tax
- training and education
- investment in R&D
What are the problems with a current account surplus?
- may upset trading partners, and they can impose trade barriers
- can lead to demand pull inflation
How do you cure a current account surplus?
- strengthen the currency
- remove barriers to trade, to increase imports
- expansionary policies to encourage consumption of imports
