Topic 4- Balance of payments Flashcards
(19 cards)
1
Q
The balance of payments
A
Is a record of all external financial transactions between one economy and the rest of the world
2
Q
The current account 4 sections
A
- Trade in Goods
- Trade in Services
- Investment Income
- Current Transfers
3
Q
The current account 4 sections:
- Trade in Goods
- Trade in Services
A
- The value of the goods exported minus the value of the goods imported
- The value of services exported minus the value of services imported
4
Q
The current account 4 sections:
- Investment Income
- Current transfers
A
- Income earned from assets owned overseas minus income paid to foreigners for assets owned in the UK (interest on overseas accounts and dividends on shares)
- Payments received from foreign institutions (e.g the EU) minus payments paid abroad (e.g to the EU or food aid to developing countries)
5
Q
Current account deficit
current account surplus
A
- Occurs when the value of goods and services imported is greater than the value of the goods and services exported (more money leaving the economy than entering economy)
- Occurs when the value of goods and services exported is greater than the value of goods and services imported.
6
Q
Does the UK have a current account deficit or surplus
A
- A deficit in its trade in goods
- A surplus in its trade in services
7
Q
5 countries the UK export with most
A
- US
- Germany
- the Netherlands
- Switzerland
- France
8
Q
Countries the UK import from the most
A
- Germany
- China
- Netherlands
- US
- France
9
Q
The capital and Financial account 4 sections
A
- Foreign direct investment (FDI)
- Portfolio Investment in shares and bonds
- Short term capital flows ‘hot money’
- Changes in foreign currency reserves
10
Q
The capital and Financial account:
- Foreign Direct investment
- Portfolio investment in shares and bonds
A
- Investment by foreign companies from abroad into the UK minus investment from UK companies to other countries abroad
- Purchase of UK shares and bonds by foreigners minus purchase of foreign shares and bonds by UK citizens
11
Q
The capital and Financial account:
- Short term capital flows ‘hot money’
- changes in foreign currency reserves
A
- Flows out of the UK to other countries
12
Q
Reasons for the UK’s current account deficit
A
- Relatively low productivity>g&s (exports) are uncompetitive
- Deindustrialization: Relocation of many manufacturing industries from the UK to countries where labour costs are significantly lower. EVAL: labour costs&transport costs have been increasing firms have returned to the UK
- High value of sterling>loss of competitiveness
- UK has a high marginal prosperity to import and therefore the continuous economics growth between 1992-2008 contributed to the deficit
- EU recession meant that there were no significant improvements when there was a 27% depreciation in the value of sterling in 2008-09
13
Q
Reasons for UK current account deficit
A
- Low Productivity
- Deindustrialization
- high value of sterling
- High marginal prosperity
- EU recession
14
Q
Significance of a current account deficit
if it if persistence it may be undesirable because…
A
- It suggests exports are uncompetitive and relying on consumer spending>lower growth in export sector
- may result in an increasing rate of unemployment (jobs in export sector decrease)
- country may be forced to borrow
- floating exchange rates>depreciation of exchange rate
- loss of confidence by foreign investors>risk that investors will remove their investments>fall in value of countries currency (devaluation)>decline in living standards&lower confidence for investment
15
Q
How can a current account deficit not be a problem (explanations)
A
- if it is caused by imports of capital goods
- if it occurs during a period of inward investment (surplus on financial account)>can create jobs&investment ) e.g US had a deficit as they borrowed money to invest into its economy>enabled higher growth&paid back debts>Other countries had confidence in US to lend money
- If it is only a short term problem
- indicate a strong economy which is growing rapidly
16
Q
How can a current account deficit not be a problem (4 reasons)
A
- Capital goods
- inward investment
- short term
- strong economy
17
Q
Evaluation of the significance of a current account deficit
A
- Depends on size of the deficit as a % of GDP e.g deficit over 5%=problem
- depends on how the country is financing the deficit e.g if it is being financed by attracting long- term capital investment>positive effects
- depends on country who has the deficit e.g US (developed country) would have less of a reason to be concerned about a deficit as they can attract capital flows to buy dollar securities whereas developing economy=more vulnerable
18
Q
Measures to reduce a current account deficit
7 measures
A
- Corporation tax
- improved infrastructure
- superfast broadband
- training and education
- Reduction in regulation and red tape
- improved child care provision
- Demand-side policies: Monetary and fiscal policies
19
Q
Measures to reduce a current account deficit (explanation) -Corporation tax
- improved infrastructure
- superfast broadband
- training and education
- Reduction in regulation and red tape
- improved child care provision
- Demand-side policies: Monetary and fiscal policies
A
- Corporation tax: In UK 2010 CT=28% now 20%> Promotes enterprise and provide incentives for firms to increase investment
- improved infrastructure: Attract investment
- superfast broadband:could ^ competitiveness
- training and education: improved training schemes and education>^productivity& ^occupational mobility
- Reduction in regulation and red tape: measures such as reductoin in bureaucracy, environmental regulations and health and safety regulation
- improved child care provision: if the UK were to adopt cheaper and better childcare arrangements many more women would join the workforce
- Demand-side policies: Monetary: ^interest rates>^to save & decrease incentive to borrow > V Imports
- Fiscal policy: Public expenditure could be reduced or taxes^. Both of these would vAD > V consumption > Vimports
