The balance of payments on current account

Current account deficit

Current account deficit - occurs when currency outflows in the current account exceed currency inflows

Current account surplus

Current account surplus - occurs when currency inflows in the current account exceed currency outflows

The main sections of the current account are the balance of trade in goods and services, net income flows and net current transfers. The current account reflects an economy’s international competitiveness and the extent to which the country is living within its means.

Balance of trade in goods

Balance of trade in goods - the part of the current account measuring payments for exports and imports of goods. The difference between the total value of exports and the total value of imports of goods is sometimes called the balance of visible trade.

Balance of trade in services

Balance of trade in services - the part of the current account and is the difference between the payments for the exports of services and the payments for the imports of services.

Net investment income

Net investment income - the difference between inward and outward flows of investment income. When net investment income is positive, the UK is earning more income generated by the direct and portfolio investments held abroad than it is paying to overseas owners of capital assets in the UK. Investment income is the main component of primary income flows in the current account on the balance of payments 

Direct investment involves sending on physical capital eg factories

Portfolio investment is the acquisition by financial firms such as pension funds and insurance companies of financial assets such as shares and bonds issued by firms and governments outside the UK. Dividend income paid by overseas companies and interest paid which then f;pw into the UK are examples of inward flows of income generated by portfolio investments. 

The rapid build-up of UK assets now owned by overseas-based companies and rich individuals has led to an investment income outflow. The fall in income earnt by UK investments overseas and persistent UK budget deficits financed by overseas borrowing have also been contributory  factors.

Transfers

Transfers - payments flowing between countries in forms such as foreign aid, grants, private transfers and gifts. They are payments without anything of economic value being received in return. Not to be confused in his contact with the part of gov spending in which tax revenues are paid to people such as pensioners, without any output being produced in return. 

Export-led growth

Export-led growth - in the short run, economic growth resulting from the increase in exports as a component of aggregate demand. In the long run, economic growth resulting from the growth and increased international competitiveness of exporting industries. 

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Reindustrialise

Reindustrialise - growth of manufacturing industries to replace industries which have disappeared or declined significantly in size. Reindustrialisation is the opposite of deindustrialisation.

Current account deficit problems

Current account deficit problems

Persistent and big deficit concerning. Problem also likely to be serious if the deficit is caused by the uncompetitiveness of the country’s industries. 

In the short run deficits allow residents to enjoy living standards boosted by imports, in the long run, decline of the country’s industries in the face of international competition lowers living standards. 

Deficit can be justified in poor country. 

Arguments against a persistently large surplus

Arguments against a persistently large surplus 

* One country’s surplus is another country’s deficit
* A balance of payments surplus can be inflationary
* It is an injection of AD into circular flow of income, increases equilibrium level of nominal or money national income. If there are many unemployed resources, beneficial and reflates real output and jobs otherwise causes demand pull inflation

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