2.1.4: Balance of payments

What is Balance of payments?

• A record of all financial dealings over period of time between economic agents of one country and al other countries

Imports

• When goods/services bought from abroad into the domestic economy

• Goods come in, money comes out

• Increase consumer choice but worsens the current account

Exports

• When goods/services are sold to freign countries from the domestic economy

• Money comes in, goods/services comes out

• Boosts the economic growth however it depends on global demand conditions

Components of BoP: Current account

• Records payments for the purchase and sale of goods/services

• Also contains the capital and financial account which records the flows of money associated with saving investment and currency stabilisation

• Flows of money are given a positive sign and outflows are given a negative

• It is split into trade in goods and services

Current account: Trade in services

• Services traded in or out of the country, known as invisibles

• Invisible import e.g: a holiday to Spain,

• Invisible export e.g: A Japanese firm buying insurance from a London firm (money enters the UK)

• Less affected by transport costs but relies on skills and global demand for expertise

Current account: Trade in goods

• Known as visibles because you can physically see them- goods that are traded, whether raw materials or financial goods

• The difference between visible exports and imports is known as the balance of trade

• (More exposed to tariffs and transport costs)

Balance of trade

• The differences between the value of exports and imports of goods and services over a period of time

• A surplus boosts AD and growth, however a deficit may indicate a lack of competitiveness

Income and current transfers

• Income transfers are the flows of earnings between countries from factors of production such as wages, interest, profit or dividends - these can be repatriated int the country e.g: a Polish person cold send the money they make in the Uk back home

• Current transfers are one way payments between countries with no good or service echanged e.g: foreign aid

• Are usually done by the government and are when they transfer money in or out of overseas organisations like the EU

• Income and current transfers can be split into primary and secondary incomes

Primary income

• The result of the loans of factors of production abroad e.g: interest, dividends

Secondary income

• The range of mainly government transfers to overseas organisations such as the EU

Current account deficit + surplus

• Is the balance of trade + balance of invisibles + net income and current transfers

• A current account surplus is where exports are greater than imports, so the current balance is positive

• Boosts national income, but may suggest over reliance on external demand

• A current account deficit is where imports are greater than exports, so the current balance is negative

• May indicate poor competitiveness, but can support growth i driven by strong domestic demand

Macroeconomic objectives

• The main four that government shave are; low unemployment (4% or lower), low and stable inflation (2.2%), economic growth of a similar rate as other economies, and a BoP equilibrium including current account balance

• However, achieving s BoP eq results in a current account deficit due to increased imports because of demand- it is high during times of high unemployment

• Governments end to want export led growth, which would cause economic growth, high employment and improve the current account balance

• However, it could also cause inflation

The interconnectedness of economies:

• Over time, the world economy has become increasingly interconnected due to four key ways that have resulted in globalisation

• The proportion of output on an individual economy which is traded internationally growing- results in more people or companies to own assets in other countries such as as businesses

• There is also increasing migration between countries

• More technology is being shared on a faster basis

• International trade has made some countries interdependent therefore, a change in the economic condition of one ill affect a minimum of one other country due to a change in the quantity of imports and exports

• In theory all current balances should add up to zero as what one country exports, another imports