Define BoP
A record of payments between one country and the rest of the world
- Made up of current, financial and capital account
Define Current account
A record of trade in goods, trade in services, investment income and current transfers
Define trade in goods/services
CURRENT ACCOUNT
- The movement of tangible products/output across international borders
Define investment income
CURRENT ACCOUNT
- The reward for investment in other countries = profits, interests and dividends
Define current transfers
CURRENT ACCOUNT
- The payment of money across international borders that has no corresponding output (eg taxes to EU)
Define current account surplus
inflows > outflows (e.g. Germany)
Define current account deficit
Inflows < outflows (e.g. UK/USA)
Define financial account
The record of money flows for investment purposes (FDI and hot money flows)
Define capital account
The record of changes in net assets in each country ( as well as errors and emissions) = puts other accounts into balance
Current account imbalances
- Not a problem if can be funded = can be a sign of living standards rising (investment)
- If cannot afford = currency value down = inflation, less competitive = unemployment in domestic economy
- Higher taxes and less government spending helps fix but can reduce growth in long run