Week 20 balance of payments Flashcards
Balance of payments definition
current account definition
investment income is the income earnt by the assets owned by our own citizens or UK assets owned by foreigners
transfers into and out of a country - debt, aid
financial account definition
what 3 flows does the current account record between the UK and other countries
current account balance
rarely occurs
current account surplus
who lends the money example of UK and Rest of the World
Current a/c:
Uk overspend so have to borrow
R o W have a surplus so save
Financial a/c
UK borrow so injection
RoW save so leakage
ends up balancing
= balance of payments
current account deficit
what is a the trade balance
trade of goods and trade of services
what can the current account be split up into
1) trade balance
2) income balance
what is income balance
investment income and transfers
what 3 things makes up the financial account
good to remember for exam
if usa buy uk bonds = inflow (vice versa)
3 demand-side reasons for a current account deficit
how does the 3 demand-side issues cause a current account deficit
1) strong domestic growth
>AD increases, incomes are high, living standards are high
–> people want to consume more and therefore imports increase
2) Recessions
> incomes abroad falling, exports decrease
–> revenue from exports falls so worsens trade balance
3) strong exchange rate , SPICE
> Imports cheaper, exports dearer
–> worsens trade balance
what determines supply-side reasons for a current account deficit
all to do with cost of exports and competitiveness of exports
4 supply-side issues with the competitiveness of exports for current account deficit
1) low investment
2) low productivity
3) high relative inflation
4) high unit labour costs
what are 2 supply-side issues with the cost of exports for current account deficit
1) poor quality/ reliability
2) depletion of resources
evaluation for causes of current account deficit
supply-side reasons are much more destructive then demand-side
because they can be long-term
why has the UK had such a big current account deficit for so long
mainly caused by supply-side reasons which are long-term and hard to recover from
can’t just change over time
3 consequences of of current account deficit
1) lower AD
> u/e increases, PL decreases and output decreases
2) debt burdens - rack up loads of debt to finance deficit (only if CA deficit is large % of GDP)
> investers may lose confidence in ability to pay debt back
–> I decreases, citizens worry about how debt will be financed as no income stream, people sell currency (depreciation)
—-> multiplier effect > currency crisis as debt and savings lose value > leads to economic crisis
3) fall in exchange rate
> import more than export supply of currency increases
–> WPIDEC
—> could correct CA deficit if exports are competitive
—-> UK exports are not competitive so will be effected by increased import prices effect producers leads to stagflation
stagflation definition
persistent high inflation combined with high unemployment and stagnant demand in an economy
Evaluation for consequences of a current account deficit
1) if deficit is small percentage of GDP like UK and US has little effect on AD
2) good consequence would be signs of domestic growth to have a CA deficit
3) supply-side vs demand-side (supply-side long term and damaging)
4) what if it is income balance that causes CA deficit
expenditure reducing policies to reduce CA deficit
all about reducing incomes, which reduces AD and imports
Evaluation of expenditure reducing policies to reduce CA deficit
1) conflicting objectives - u/e increases, growth decreases, potential recession and inflation may go below target
2) too high consumer and business confidence causes AD not to fall
3) economy is at full employment a reduction in AD won’t effect incomes to fall that much
4) Marginal propensity to import not that high reducing incomes won’t effect incomes enough to reduce imports
