Balance of payments

What is the balance of payments

A record of all the financial transactions that has occurred between in and the rest of the world.

What are the two sections in the balance of payments

Current account and the financial and capital account.

What is the current account in the balance of payments

It records the net income that an economy gains from international transactions with all transactions related to goods and services along with payments related to the transfer of primary and secondary income

Current account

Should balance with the capital and finance account and be equal to zero

What happens if current account balance is positive

Financial and capital account balance is negative

What are the components of the current account in the balance of payments

Trade in goods, Trade in services, Primary income, secondary income

What is the financial and capital account in the balance of payments

All transactions related to savings, investment and currency stabilisations

What is credit

What money flowing into the country is recorded as

What is debit

What money flowing out is recorded as

What is a current account deficit

When the value of the outflows is greater than the value of inflows and usually occurs when debits from imports is larger than credits from exports.

What is a current account surplus?

When the value of inflows is greater than the value of outflows and usually occurs when the debit from imports is less than credits from exports

Explain the relationship between current account imbalances and macroeconomic objectives

If the current account is running a deficit, this has a negative impact on aggregate demand as if net exports are negative then aggregate demand decreases.

What could government do to correct current account deficit

The government could raise tariffs which would decrease imports bought by households, firms that rely on imports for raw materials would now face higher costs of production and higher prices for consumers.

What is the risk of reducing the current account deficit

Reducing the current account deficit has come at the expense of increased inflation in the economy- there has been a trade off

Explain the interconnectedness of economies through trade

High level of interdependence between economies (evident through covid 19 and ukraine war). Producers are highly dependent on imported raw materials used in production (building a car is global effort)