2.1.4 - Balance of Payments

What is the balance of payments?

• record of all financial transactions between consumers, businesses and the govt in a country

• Inflows of foreign currency - positive entry

• outflows of foreign currency - negative entry

• parts:

  • Current account

  • Financial account

  • Capital account

What’s the current account?

Measures the difference of money and credit coming in and leaving an economy

• trade balance on goods

• Trade balance in services

• Net primary income from overseas assets

  • Remittances from migrant workers

  • Flow of profits from FDIs

• Net secondary income

  • Overseas aid/ debt relief

  • Uk payment to EU

What is a current account deficit?

• net outflow of income in economy

• External deficit

• Debtor countries

• E.g UK and USA

What is a current account Surplus?

• external surplus

• Net income of income in an economy

• Creditor nations

• E.g Germany (machinery), Norway, South Korea

Does a current account deficit matter?

• can lower AD - slows growth of real GDP → lowers S of L

• Can cause job losses in domestic industries - regional decline or structural unemployment

• Currency weaknesses and inflation - may leave county short of foreign currency reserves

• May reflect uncompetitiveness - supply-side weakness

Causes of a deficit (current account)

• Poor price and non-price competitiveness

  • High relative inflation than trading partners

  • Low investment levels and R&D

  • Weak design/branding/non-price factors

• Strong Exchange rate

  • Strong currency

    • Imports cheaper - substitute for domestic goods

    • Exports expensive - fall in sales - less competitive

• Recession on 1 or more trading partners

  • Recession in partner - cuts value of exported goods/services to these countries - can’t afford it

  • Businesses may see higher barriers to entry - switch to abroad nations or quicker growth

• Volatile commodity prices

  • Fall in prices - hits exporters -PPD

  • Importers - increase in prices - oil/gas

• Boom in domestic economy

  • More imports for raw materials

  • Houses - higher MPI - wealth effect?