3d. Current account

Problems with high levels of unemployment

The balance of payments is a record of all the financial dealings over a period of time between economic agents of one country and all other countries.

BOP accounts can be split into two components. In Theme 2 we study the current account where payments for the purchase and sale of goods and services are recorded

Components of a current account

Trade in Goods

This trade is in raw materials, semi manufactured goods and finished goods. Goods leave the country and payment comes in. The visible exports of cars results in an inward flow of money and is recorded as a + on the BOP. This is the opposite for imports. The difference between visible exports and visible imports is known as the balance of trade. Trade in goods is often called trade in VISIBLES

Trade in services

This includes financial services, insurance, transport services such as shipping or air travel, and tourism. This is an example of trade in invisibles. Exports of invisibles are bought by foreigners e.g. an American paying for a hotel room in London is an invisible export.

Income and current transfers

Not all flows of money are from trades of goods or services:

• Income results from a loan of factors of production abroad.
• Current transfer are a range mainly of government transfers to an from overseas organisations such as to the EU

Current account deficits and surpluses

Surplus Relates to a particular part of the account. It is where credit items are greater than debit items on this part of the account e.g. Exports > Imports

Deficit It is where debit items are greater than credit items on a part of the account e.g. Imports > Exports

Causes of changes in the current account balance

Goods and services sold to foreigners are exports.

Goods and services bought overseas are imports. These change for a variety of reasons.

• The exchange rate may change
• The price in national currencies of goods and services may change
• Many goods and services are non homogeneous
• Aggregate demand may change the domestic or world economy

Exchange rates

An exchange rate is the value of one currency against another

The British pound (£) is a floating currency meaning that its value is determined by supply and demand

Changes will have an enormous impact on our ability to import and export goods and services

Exchange rates

A strong pound means that we are able to buy more of a foreign currency. This works in opposite from the point of view of a foreign country. As it strengthens it is said to appreciate. This is seen as a good thing for imports and a bad thing for exports

A weak pound means that we are able to buy less of a foreign currency. This works in opposite from the point of view of a foreign country. As it weakens it is said to depreciate. This is seen as a bad thing for imports and a good thing for exports