Balance of payments

Balance of payments

Record of all payments between one country and the rest of the world

Current account

Measure inflow and outflow of trade in goods, services, investment incomes, current transfers

Investment income

Any rent, profit, earned on investment made abroad

Current transfers

Money transferred abroad without getting any goods or services back in exchange.

Remittances (type of current transfers)

When workers send wages back to their home country

Current account deficit

Negative current account where total inflows are less than the total outflows

Current account surplus

Positive current account where total inflows are less than total outflows

Current account equilibrium

Total inflow=total outflow

Capital & financial account

track inflow and outflow of assets and investments in a country

FDI

Investment made by a firm in one country into a firm in another country to gain control over the foreign firm

Hot Money Flows

When foreign investors place their spare cash into the foreign banks that have the highest interest rates to maximise the interest they receive

Factors affecting current account

Exchange rate, relative inflation, productivity and costs, quality, growth in real income, protectionism

Policies to reduce current account deficit

expenditure reducing policy, expenditure switching policies, supply side policies

expenditure reducing policy

policies that get consumers to reduce their spending, which will in turn reduce spending on imports (raise tax, cut benefits)

Expenditure switching policies

Policies that get consumers to switch from buying imports to domestic goods (trade barriers, lower interest rates)

supply side policies

reduction in corporation tax, increasing spending on education, reducing minimum wage