2.1.4 Balance of Payments

Here are the spec points

What is is the idea of balance of payments?

the balance of payments (BoP) is a record of all economic transactions between a country and the rest of the world. It is divided into two main components; the current account and the capital and financial account.

Explain the measure of Balance of Trade in Goods.

It measures the difference between the value of a country’s exports and imports tangible goods (e.g machinery, cars and clothing).

A trade surplus occurs when exports exceed imports, and a trade deficit occurs when imports exceeds exports.

For example China consistently runs a trade surplus due to its strong manufacturing sector, exporting products worldwide.

Explain the Balance of Trade Services

It accounts for the value of services traded internationally, such as tourism, financial services, and consulting.

A surplus in trade services occurs when a country exports more services than it imports.

For example: the United States often has a surplus in service trade due to its leadership in technology and financial services.

Explain Income Balance

This includes earnings from abroad (e.g dividends, interest, and wages) and payments made to foreign investors.

A surplus in income balance indicates that a country earns more from its foreign investments than it pays to foreign investors.

Explain Current transfers

This category includes foreign aid, remittances sent by migrant workers, and other unilateral transfers.

It can be positive (inflows) or negative (outflows)

When does a current account deficit occur?

It occurs when a county’s imports of goods, services, income and transfers exceeds its exports in those categories.

It implies that the country is spending more than it is earning from the rest of the world.

Give an example of a current account deficit

The united states has often had a current account deficit, as it imports more goods and services than it exports

What is a current account surplus?

it occurs when a country’s export of goods, services, income, and transfer exceeds its imports.

It implies that the country is earning more than it is spending internationally

Give an example of current account deficit

Germany has frequently has a current account surplus due to its strong export-oriented economy.

What is the relationship with current account imbalances and other macroeconomic objectives?

• Impact on exchange rates

• impact of economic growth

• impact on employment

• impact on inflation

what impact does current account imbalances have on exchange rates?

A persistent current account deficit may lead to a depreciation of the country’s currency, making exports more competitive and imports more expensive. This can help correct deficit.

what impact does current account imbalances have on economic growth

a surplus can lead to higher savings and investment, potentially boosting economic growth. However, a persistent deficit may lead to unsustainable borrowing

What impact does current account imbalances have on employment

A trade surplus may support job creation in export-oriented industries, while a deficit can lead to a job in import-competing sectors.

What impact does current account imbalances have on inflation

a depreciating currency (due to a deficit in current accounts) can lead to imported inflation, affecting the domestic price level.

Explain th3 ways there is interconnectedness of Economies through International Trade and Give an example of this

1. International trade fosters economic interdependence among countries. One country’s economic policies and developments can have ripple effects globally.

For example the 2008 financial crisis the united states had global repercussions, as it led to reduced demand for imports from other counties, affecting their economic growth

2. Supply chain integration: Many products involve components from multiple countries. Disruptions in one country can disrupt global supply chain.

Example: The COVID 19 pandemic disrupted many supply chains world- wide, affecting industries from electronics to pharmaceuticals.

3. Benefit of trade: International trade allows countries to specialise in producing what they are most efficient at, leading to efficiency gains and a higher standard of living.

Example: Switzerland specializes in the production of high quality watches, benefiting from a strong reputation in the global market.