In-Depth Notes on Balance of Payments and Current Account

GOVERNMENT AND THE ECONOMY

Balance of Payments on the Current Account

Overview of South Korea's Economy
  • South Korea has an open economy, meaning it actively engages in international trade.
  • Key Questions:
    1. What does an open economy entail?
    2. Compare the value of goods bought vs. sold by South Korea in the last quarter of 2016.
    3. Analyze if South Korea benefits from trading with other nations.
    4. Class activity to list goods and services your country buys and sells abroad.
Current Account on the Balance of Payments
Key Vocabulary
  • Balance of Payments: Record of all international trade transactions.
  • Capital and Financial Account: Records flows of savings, investments, and currency exchanges.
  • Current Account: Records all exports and imports.
  • Exports: Goods/services sold overseas.
  • Imports: Goods/services bought from overseas.
Current Account Deficits and Surpluses
Definitions
  • Current Account Deficit: Occurs when imports exceed exports; negative current balance.
  • Current Account Surplus: Occurs when exports exceed imports; positive current balance.
Understanding Trade
  • Goods/services sold overseas are exports. Examples include semiconductors, petrochemicals, automobiles.
  • Goods/services bought from other countries are imports. Examples include crude oil, natural gas, electronics.
  • Balance of Trade: Difference between visible exports and imports.
Visible and Invisible Trade
Definitions
  • Visible Trade: Trade in physical goods (e.g., wheat, cars).
  • Invisible Trade: Trade in services and income flows from overseas assets.
  • Current Balance: Sum of balance of trade and invisible balance.
Nigeria's Balance of Trade Case Study
  • Nigeria: Africa's largest economy, reliant on petroleum exports (95% of exports).
  • Imports include machinery, chemicals, and food.
  • Key Questions:
    1. What defines visible trade?
    2. What is the balance of trade?
    3. Analyze Nigeria's balance of trade pattern from 2015-2016.
    4. Identify possible reasons for trade patterns observed.
Relationship Between Current Account and Exchange Rate
  • A stronger currency makes exports more expensive and imports cheaper, potentially widening a current account deficit.
  • A current account surplus can lead to increased demand for a country's currency, strengthening it.
Examples of Real-World Exchange Rates
  • Exchange rates fluctuate based on market conditions. For example, the pound dropped from £1 = $1.50 to £1 = $1.24 post-Brexit.
  • Impact of Exchange Rate Changes:
    • Can influence international trade and current account balance.
Reasons for Deficits and Surpluses
  1. Quality of Domestic Goods: High-quality goods can boost exports; poor quality can increase imports.
  2. Quality of Foreign Goods: Superior goods from abroad can decrease demand for local products, worsening the current balance.
Impact of a Current Account Deficit
  • Leakages from the Economy: Increased dependency on imports can threaten domestic output/employment.
  • Inflation: Rising import prices can lead to higher domestic inflation, affecting the general price level.
  • Low Demand for Exports: Indicates potential structural weaknesses in the economy, as poor quality goods may not sell well abroad.
  • Funding the Deficit: Countries may need foreign currency or resort to borrowing if persistent deficits arise.