Economics unit 2 - balance of payments

Balance of payments

The record of all financial transactions between one country and the rest of the world

Balance of payments on current account

The total of net trade in goods and services, income flows and transfers between one country and the rest of the world

Current account

The record of trade in goods and services, income flows and transfers between one country and the rest of the world

Balanced current account

Where the sum of exports plus the inflow of income and transfers is equal to the sum of imports plus the outflow of income and transfers

Current account surplus

where the sum of exports plus the inflow of income and transfers is greater than the sum of imports plus the outflow of income and transfers

Current account deficit

Where the sum of exports plus the inflow of income and transfers is less than the sum of imports plus the outflow of income and transfers

Why a currency account of deficit is important

Could indicate low international competitiveness & poor quality. It can lead to higher unemployment, may lead to cut in gov spending

Why a currency account of deficit is not as important

Could be short term - increase in imports of factors of production, reduces inflation, leads to a fall in exchange rate, leads to more competitiveness internationally

Importance of a current account surplus

Reflect rising demand for domestic goods - lower unemployment, decreases debt of the country

Why a current account surplus is not so important/ a benefit

Higher inflation,rise in the exchange rate, hides causes that have a negative impact on global economic growth like, protectionist policies giving domestic goods an artificial advantage

Causes of a surplus of the current account

Strength of the economy, lack of growth so kess imports being bought, a fall in the exchange rate, a net inflow of investment income

Causes of a deficit of the current account

Structural problems within the economy, falling incomes abroad - fall in exports, increasing domestic incomes -increased imports. A rise in the exchange rate, a net outflow of investment income