chapter 8.4 - the balance of payments on current account

current account deficit

occurs when currency outflows in the current account exceed currency inflows - exports are less than imports

current account surplus

occurs when currency inflows in the current account exceed currency outflows - exports are more than imports

a credit item

an item which results in net currency flowing into the UK - represented by a plus sign (+) in the current account

a debit item

an item which results in net currency flowing out of the UK - represented by a minus sign (-) in the current account

balance of trade in goods

the part of the current account measuring payments for exports and imports of goods - shows the extent to which the value of exports of goods exceeds the value of imports, and vice versa

balance of invisible trade

the difference between the total value of exports and the total value of imports

why are only 'selected' items included in the balance of trade of goods and services

to try and separate the most interesting items from the 'background noise' of less interesting items

balance of trade in services

the part of the current account which measures the difference between the payments made for the exports of services and the payments made for the imports of services

net investment income

the difference between inward and outward flows of investment income - the main component of primary income flows in the current account of the balance of payments

positive net investment income

the UK is earning more income generated by the direct portfolio investment held abroad than it is paying to overseas owners of capital assets in the UK

direct investment

involves spending on physical capital such as factories, shopping centres, and oil refineries

portfolio investment

the acquisition by financial firms (e.g. pension funds, insurance companies) of financial assets, such as shares and bonds, issued by firms and governments outside the UK

examples of inward flows of income generated by portfolio investment

dividend income paid by overseas companies, and interest paid by overseas governments, which then flows into the UK

transfers

payments flowing between countries in forms such as foreign aid, grants, private transfers and gifts - payments made without anything of economic value being received in return

balance of payments equilibrium

occurs when the current account more or less balances over a period of years, and is perfectly compatible with the occurrence of short term current account deficits and surpluses

fundamental balance of payments disequilibrium

exists when there is a persistent tendency for payments for imports to be significantly greater or lesser than payments for exports over a period of years

balance of payments balancing

all sections of the balance of payments must sum to zero - never occurs because many items in the balance of payments are inaccurately measured and recorded

export led growth in the short run

economic growth resulting from an increase in exports as a component of aggregate demand

export led growth in the long run

economic growth resulting from the growth and increased international competitiveness of exporting industries

reindustrialisation

growth of manufacturing industries to replace industries which have declined significantly in size - opposite of deindustrialisation

costs of current account deficits

if caused by competitiveness of the country's industries, in the long run, the decline of the country's industries in the face of international competition lowers living standards

why can a current account deficit be justifies in a poor country

the country needs to import capital goods on a large scale to modernise the country's infrastructure + to promote economic development - but it could end up financing a 'champagne lifestyle' of the country's ruling elite

arguments against a persistently large current account surplus

one country's surplus is another country's deficit, because the balance of payments must balance for the world as a whole; can cause domestic inflation, because it's an injection into the CFI, which increases equilibrium level of national income