Balance of Payments

definition of balance of payments?

all the financial transactions between the UK and other international economies

The accounts are split into two - current accounts which measure the trade in goods and services and the capital account which tracks the capital flow in and out of the UK.

definition of balance of trade?

The value of exports minus imports. It only includes the exports and imports of goods and services nothing else

what 4 components are in the current account?

• Trade in goods

• Trade in services

• Investment in income

• Transfers

what are the 4 components in the capital account?

• Direct investment

• Portfolio investment

• Other investments

• Reserve Assets

what are the causes of a current account deficit?

• High prosperity to buy imported goods and services - UK consumers prefer foreign goods

• Lack of productive capacity of UK firms

• Poor price and non-price competition of UK firms

• Declining comparative advantage in many areas - Uk manufacturing sector is suffering

• An over-valued exchange rate - too high?

• falling surplus in UK’s trade in oil

advantages of a current account deficit?

• more consumer choice

• imports better value for money therefore create economic wealth

• Imports increase the level of competition for domestic firms

• Imports provide raw materials to carry on production domestically

how would you correct a current account deficit?

• Tighten fiscal policy

• Tighten monetary policy

• Tamper with exchange rates - potentially lower them

• Import control - tariffs

• Improve UK competitiveness