Can some one explain the current account, and the balance of payments?
Hello,
I'm doing AQA Economics Unit 2,
I don't understand the current account and the balance of payments, can some one break it down for me and tell me all i need to know for the exam, I appreciate any help!
Thanks in advance!
I'm doing AQA Economics Unit 2,
I don't understand the current account and the balance of payments, can some one break it down for me and tell me all i need to know for the exam, I appreciate any help!
Thanks in advance!
Balance of Payments is the difference between money going IN and money going OUT in an economy.
An economy where more money goes OUT than IN is in a BoP Current Account DEFICIT. (for example to pay for imported goods)
An economy where more money goes IN than OUT is in a BoP Current Account SURPLUS. (for example to receive payment for exports)
The current account records the INTERNATIONAL EXCHANGE of goods and services.
Countries in deficit are usually UNCOMPETITIVE
There are FOUR sections of the current account:
GOODS - Physical and visible exchanges. Laptops and smartphones.
Link to the UK: Biggest UK exports are in PHARMACEUTICALS (/CHEMICALS) and AUTOMOBILES (vehicles). UK is in heavy deficit of OIL and is our biggest import.
SERVICES - Untouchable and invisible exchanges. Tourism and transport.
Link to the UK: Biggest UK exports are in FINANCIAL SERVICES (banking) and INSURANCE. Tourism is our biggest import. (When you go abroad it is an import, when tourists come here it is an export)
INVESTMENT - Untouchable and invisible exchanges AS A RESULT OF EARLIER INVESTMENT. Interest on bank deposits in foreign countries and profits brought in by UK corporations from overseas.
Link to the UK: Corporations such as BP, Rio Tinto and BAE that TRADE ABROAD and bring back profits to the UK are considered an EXPORT - they make our current account better. DIVIDENDS from foreign corporations to UK shareholders are also an export.
TRANSFERS - Both visible and invisible exchanges that are done in MONEY. They are one-way and are NOT linked to any goods, services or investments. These includes REMITTANCES and FOREIGN AID.
Link to the UK: The UK Government pays 13 BILLION POUND STERLING on FOREIGN AID - money that goes on international development, mainly to Africa. REMITTANCES are paid by residents in the UK who send money to family or friends abroad. Mainly by families in the UK to Spain and Australia and by immigrants in the UK to Poland.
The UK has had a current account deficit since 1985.
CAUSES OF DEFICIT (if you invert them it's causes of surplus)
INFLATION - If inflation in the UK rises COMPARABLE TO OTHER COUNTRIES then EXPORTS will FALL because they will become more expensive and less competitive abroad.
EXCHANGE RATES - If the Pound Sterling APPRECIATES then the price of our exports in foreign countries will be DEARER and will decrease. But we have more PURCHASING POWER and can buy IMPORTS at a lower price.
ECONOMIC GROWTH - Theoretically, as our consumer spending increases more is spent on IMPORTS than DOMESTIC PRODUCTS as they are more ATTRACTIVE. (you can argue this is a normative statement) CORPORATIONS will buy more goods from ABROAD.
WAGES - As wages rise, costs of production rise (although this effect is inverse if productivity rises faster than wages, but lets ignore this.) It is then CHEAPER for DOMESTIC CORPORATIONS to produce ABROAD, so they close domestic operations and OUTSOURCE.
INCOMES - Same as economic growth.
PRODUCTIVITY - If productivity FALLS then it becomes more expensive to make products as the economy moves inwards on PPF. This will cause DOMESTIC goods to APPRECIATE and imports will INCREASE. (Exports may also decrease to compensate for the higher price of production)
FOREIGN DOWNTURNS - As countries experience economic downturns their SPENDING on imports (our EXPORTS) will decrease.
FOREIGN TARIFFS - Countries may impose TARIFFS on our EXPORTS (their imports) in order to protect the INCOMES OF DOMESTIC PRODUCERS. (This is a tax on imports, a protectionist policy)
EFFECTS OF A DEFICIT:
The Pound Sterling may DEPRECIATE as the UK pays for IMPORTS. (UK sells Pounds on world markets to pay for imports) and this EXCEEDS foreign countries paying us in pounds for EXPORTS.
^ This actually means that in the long run, a current account deficit may make our goods more competitive on the world market as our currency depreciates
As a result of the currency depreciation IMPORTS will INCREASE IN PRICE. This may in turn decrease demand for imports and lower the deficit UNLESS the good is price inelastic (such as oil) and then imports will INCREASE as we pay more for our oil.
Rise in costs may cause COST-PUSH inflation.
Increases in imports may cause JOB LOSSES DOMESTICALLY as domestic goods are no longer demanded.
Increases in imports cause AGGREGATE DEMAND to DECREASE, meaning GROSS DOMESTIC PRODUCT may decrease.
That's all you need to know, I think. At least in AQA.
An economy where more money goes OUT than IN is in a BoP Current Account DEFICIT. (for example to pay for imported goods)
An economy where more money goes IN than OUT is in a BoP Current Account SURPLUS. (for example to receive payment for exports)
The current account records the INTERNATIONAL EXCHANGE of goods and services.
Countries in deficit are usually UNCOMPETITIVE
There are FOUR sections of the current account:
GOODS - Physical and visible exchanges. Laptops and smartphones.
Link to the UK: Biggest UK exports are in PHARMACEUTICALS (/CHEMICALS) and AUTOMOBILES (vehicles). UK is in heavy deficit of OIL and is our biggest import.
SERVICES - Untouchable and invisible exchanges. Tourism and transport.
Link to the UK: Biggest UK exports are in FINANCIAL SERVICES (banking) and INSURANCE. Tourism is our biggest import. (When you go abroad it is an import, when tourists come here it is an export)
INVESTMENT - Untouchable and invisible exchanges AS A RESULT OF EARLIER INVESTMENT. Interest on bank deposits in foreign countries and profits brought in by UK corporations from overseas.
Link to the UK: Corporations such as BP, Rio Tinto and BAE that TRADE ABROAD and bring back profits to the UK are considered an EXPORT - they make our current account better. DIVIDENDS from foreign corporations to UK shareholders are also an export.
TRANSFERS - Both visible and invisible exchanges that are done in MONEY. They are one-way and are NOT linked to any goods, services or investments. These includes REMITTANCES and FOREIGN AID.
Link to the UK: The UK Government pays 13 BILLION POUND STERLING on FOREIGN AID - money that goes on international development, mainly to Africa. REMITTANCES are paid by residents in the UK who send money to family or friends abroad. Mainly by families in the UK to Spain and Australia and by immigrants in the UK to Poland.
The UK has had a current account deficit since 1985.
CAUSES OF DEFICIT (if you invert them it's causes of surplus)
INFLATION - If inflation in the UK rises COMPARABLE TO OTHER COUNTRIES then EXPORTS will FALL because they will become more expensive and less competitive abroad.
EXCHANGE RATES - If the Pound Sterling APPRECIATES then the price of our exports in foreign countries will be DEARER and will decrease. But we have more PURCHASING POWER and can buy IMPORTS at a lower price.
ECONOMIC GROWTH - Theoretically, as our consumer spending increases more is spent on IMPORTS than DOMESTIC PRODUCTS as they are more ATTRACTIVE. (you can argue this is a normative statement) CORPORATIONS will buy more goods from ABROAD.
WAGES - As wages rise, costs of production rise (although this effect is inverse if productivity rises faster than wages, but lets ignore this.) It is then CHEAPER for DOMESTIC CORPORATIONS to produce ABROAD, so they close domestic operations and OUTSOURCE.
INCOMES - Same as economic growth.
PRODUCTIVITY - If productivity FALLS then it becomes more expensive to make products as the economy moves inwards on PPF. This will cause DOMESTIC goods to APPRECIATE and imports will INCREASE. (Exports may also decrease to compensate for the higher price of production)
FOREIGN DOWNTURNS - As countries experience economic downturns their SPENDING on imports (our EXPORTS) will decrease.
FOREIGN TARIFFS - Countries may impose TARIFFS on our EXPORTS (their imports) in order to protect the INCOMES OF DOMESTIC PRODUCERS. (This is a tax on imports, a protectionist policy)
EFFECTS OF A DEFICIT:
The Pound Sterling may DEPRECIATE as the UK pays for IMPORTS. (UK sells Pounds on world markets to pay for imports) and this EXCEEDS foreign countries paying us in pounds for EXPORTS.
^ This actually means that in the long run, a current account deficit may make our goods more competitive on the world market as our currency depreciates
As a result of the currency depreciation IMPORTS will INCREASE IN PRICE. This may in turn decrease demand for imports and lower the deficit UNLESS the good is price inelastic (such as oil) and then imports will INCREASE as we pay more for our oil.
Rise in costs may cause COST-PUSH inflation.
Increases in imports may cause JOB LOSSES DOMESTICALLY as domestic goods are no longer demanded.
Increases in imports cause AGGREGATE DEMAND to DECREASE, meaning GROSS DOMESTIC PRODUCT may decrease.
That's all you need to know, I think. At least in AQA.
(edited 8 years ago)
Original post by SotonianOne
As a result of the currency depreciation IMPORTS will INCREASE IN PRICE. This may in turn decrease demand for imports and lower the deficit UNLESS the good is price inelastic (such as oil) and then imports will INCREASE as we pay more for our oil.
As a result of the currency depreciation IMPORTS will INCREASE IN PRICE. This may in turn decrease demand for imports and lower the deficit UNLESS the good is price inelastic (such as oil) and then imports will INCREASE as we pay more for our oil.
Although I doubt it will come up, it will be inverse for the United States because oil is paid for in dollars.
Original post by SotonianOne
Although I doubt it will come up, it will be inverse for the United States because oil is paid for in dollars.
Are you doing A levels as well?
Original post by High Stakes
Are you doing A levels as well?
AS
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