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Economics B of P question

I have having trouble understanding Balance of Payments.

Q: If a japanese firm builds a new factory in the UK how would this affect the UK's balance of payments?

I have no idea, would it be no effect on current account (no imports/exports of goods possibly materials for factory???)

On the capital account would the factory be an investment in new machinary etc, meaning that the BofP would increase?

Any help explainging this? Will give rep!

What would be different if the Japanese firm buys a Uk firm and continues running that, would that be a deficit in the capital account becuase the income is going back to Japan?
Reply 1
Avatar for RobSharpe
RobSharpe
Everyone hates BoP stuff in my class...

If a Japanese firm sets up shop in the UK, then the effect it has on the economy depends on a number of things.

Is it bringing all its raw materials in from Japan? Or is it using UK raw materials to make products?

Is its UK factory making products to sell in the UK, or in Japan?

There are many considerations.

In general... the PSNCR (budget deficit) will increase, so long as less things are exported than imported. The UK has a high MPM, so this is usually the case.

Rob :smile:
Reply 2
Avatar for ~pixie~
~pixie~
in a nutshell, there will be an inflow in the foreign direct investment subcategory in the financial account because the firm will be purchasing factors of production such as land in the UK. this will happen over a very short space of time. in terms of the current account, there will be in the long term an outflow from the income account because the profits from the japanese firm will be going back to japan.

however, like robsharpe said, there are many other considerations that would gain you good evaluative marks.

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