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Flashcards in Balance Of Payments Deck (21)
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1

What is the BALANCE OF PAYMENTS

It measures a country's transactions with the rest of e world and is comprised of two main elements.
The current account and Capital/financial account

2

What does the CURRENT ACCOUNT do (4)

1. Net trade in goods - cars, clothes
2. Net trade in services- tourism, banking
3. Net investment incomes- profits sent back to country of origin
4. Net transfer flows- payments to the EU

3

What is a current account deficit?

The value of imports is greater that the value of exports

4

A deterioration of the current account means the deficit gets what?

Bigger

5

Capital/ Financial account measures what? (2)

1. Short term capital flows- investors saving money in UK banks
2. Long term capital flows- Japanese firms investing in the UK

6

What is the Capital/Financial account?

Refers to transfer of funds associated with buying fixed assets, such as land

7

What is the balance of payments equilibrium?

If there is a deficit in the current account there will be a surpluses equal to that in the capital account. Vice Versa

8

Reasons for a current account deficit (5)

1. Overvalued exchange rate
2. Declining Competitiveness
3. Fast economic growth
4. Low savings ratio
5. Capital inflows

9

How does overvalued exchange rate cause CAD

Makes exports more expensive so imports are cheaper.

10

How do declining competitiveness cause CAD

If Prices increase in the UK more than Europe then demand decreases for UK exports

11

How does fast economic growth cause CAD

As we already import more an increase in spending leads to more imports

12

How does a lower saving ratio cause CAD

Lower savings tend to cause an increase in consumer spending on imports

13

How does capital inflows lead to CAD

Large inflows of foreign capital leads to increase in imports

14

Problems with Current Account Deficit (4)

1. Potentially unsustainable
2. Foreign claim on UK assets
3. Depreciation
4. Reflection of economic weakness
5.lower ad

15

Why is the CAD potentially unsustainable

If he CAD is financed through borrowing long term, countries are burdened with high interest payment

16

How does the CAD mean more foreign claim on UK assets

If the deficit is financed by long term investment foreigners will have an increasing claim

17

How does the CAD lead to depreciation

It's likely to cause depreciation and an increase on import prices and decrease the standard of living

18

How does the CAD reflect economic weakness

Could be argued that a persistent deficit suggests fundamental weakness

19

Why is the CAD not always harmful (4)

1. Finance investment
2. Inward investment can benefit the economy
3. Floating exchange rate will restore balance
4. Size of deficit

20

Measures to reduce the current account deficit (4)

1.Devaluation/depreciation - P i+= QD - weaker pound so E attractive- i expensive
2. Deflationary policies- +i people save more less spending also +import tax
3. Supply side policies- improve competition by improve labour productivity, make exports more appealing
4. Protectionism- + tariffs= i- in short term

21

How does a CAD lead to lower ad?

If imports are greater than exports then (X-M) is going to be negative. This means ad will drop