10.3 balance of payments

balance of payments is

the record of all money flows or transactions between the residents of a country and the rest of the world in a particular period, usually monthly, quarterly or annually

balance of payments is made up of

current account, financial/capital account, balancing items

current account

measures all the currency flows into and out of a country in a particular time period in payment for exports and imports of goods and services, together with primary and secondary income flows

trade in goods is

exports and imports of visible, tangible items such as cars, oil and tea

trade in services is

trade in exports and imports such as financial services, tourism and shipping

primary income flows are

inward primary income flows comprise income flowing into the economy which is generate by UK-owned capital assets located overseas. outward primary income flows comprise income flowing out of the economy in the current year, which is generated by overseas-owned capital assets owned in UKq

secondary income flows are

current transfers, such as gifts of money, international aid and transfers between the UK and EU, flowing into or out of the UK economy in a particular year

the capital account is

record of the transfer of funds associated with buying fixed assets and capital, its usually insignificant. such as sales of assets like capital goods or intangible assets like land or inherited property, taxes like inheritance tax, debt forgiveness to countries, migrant transfers

the financial account is

a record of all transactions for financial investment (capital flows into and out of economy)

foreign direct investment is

investment in capital assets, such as manufacturing and service industry capacity, in a foreign country by a business with headquarters in another country

portfolio investment is

the purchase of one countries securities e.g bonds and shares by the residents of financial institutions of another country

an expenditure reducing policy

is a gov policy which aims to eliminate a current account deficit by reducing demand for imports and reducing AD

expenditure switching policy is

a gov policy which aims to eliminate a CA deficit by switching domestic demand away from imports to domestically produced goods

the three policies to reduce a current account deficit are

deflation, direct controls, devaluation

deflation help CA deficit as an

expenditure reducing policy

direct controls helps CA deficit as 

expenditure switching policy, involves imposing import controls

devaluation helps C deficit as

expenditure switching policy, WPIDEC

reasons a CA deficit are a problem

risk of unsustainable debt, dependence on foreign capital, currency depreciation pressure, weak competition, vulnerable to shocks

reasons CA deficits aren’t a problem

can be to finance investment not consumption which can boost future growth and repay itself, sign of strong domestic demand, part of development, attracts foreign capital, increases SOL

pg 331 textbook