The international economy: the balance of payments Flashcards
(23 cards)
What accounts are the balance of payments made up of?
- Current account
- Financial account
- Capital account
What is the current account?
The current account comprimises of flows of trade in goods, trade in services, primary income and secondary income into and out of a country in a particular time period.
What is the financial account?
Records the flow of all transactions associated with changes of ownership of the countrys foreign financial assets and liabilities
- FDI
- Portfolio investment
- Official borrowing
- Reserve assets
What is the capital account?
Records small capital flows inbetween countries
- Capital transfers
- Transactions in non-produced, non-financial assets
What is a deficit on the current account?
Currency outflows exceed currency inflows
What is a surplus on the current account?
Currency inflows exceed currency outflows
Factors influencing the CA balance?
- Productivity (exports)
- Inflation
- Exchange rates
Consequences of investment flows between countries?
This affects the financial account
Inflow= +Demand for currency=appreciation=SPICED
Outflow= +Supply= Depreciation=WIDEC
Policies to correct a CA deficit?
- Do nothing
- Expediture switching
- Expenditure reducing
- Supply side (Long run solution)
Policies to correct a CA surplus?
- Nothing
- Expenditure increasing
What is an expenditure-switching policy?
Policies which aim to reduce a current account deficit by switching domestic demand away from foreign goods to domestic goods
(Protectionism, Devaluation)
What is an expenditure-reducing policy?
Policies which aim to reduce a CA deficit by reducing te demand for imports, by reducing AD in an economy
(Contractionary fiscal & monetary)
What is the UKs current account balance?
Deficit of 2.6%
Consequences of a persistent deficit?
- Depreciation
- Can increase IR
- +Foreign assets (finance deficit through capital inflows)
- +National debt to finance deficit
- Lower credit ratings
What is the balance of payments?
A record of all the currency flows into and out of a country in a particular time period.
What is the balance of primary income?
Comprimises inward income flowing into the economy in the current year, generated by UK-owned capital assets located overseas, and outward flows of income from the economy in the current year, generated by overseas-owned capital assets located in the UK.
Made up mostly of investment income generated from profits, dividends and interest payements flowing between countries.
What is the balance of secondary income?
Current transfers of income, flowing into or out of the UK economy in a particular year.
E.G:
- Gifts abroad
- Overseas charities
- Overseas aid
Net balance of BoP?
The current account should equal with the financial and capital accounts to equal zero
- CA surplus = financial & capital deficit (excess income from exports finances purchase of assets vice versa)
It must also balance globally, once countries surplus is another countries deficit.
What is the balance of trade in goods?
The part of the current account measuring payments for exports and imports of goods.
The difference between the total value of exports and the total value of imports aka the balance of visible trade.
What is the balance of trade in services?
The part of the current account, thr difference between the payments for the exports of services and the payments for the imports of services.
What is foreign direct investment (FDI)?
Investment in capital assets in a foreign country by a business with headquarters in another country.
Very often, the overseas company establishes subsidiary companies in the countries in which it is investing.
What is portfolio investment?
The purchase of one country’s securities by the residentd or financial institutions of another country.
What is short-term speculative capital (hot money)?
Refers to flows of money across international borders, moving to find the greatest short-term return; it is usually very easy to move and will move very quickly as returns and opportunities arise.
