2.1: BOP

• What does the Balance of Payments (BoP) record for a country?

  All the financial transactions that occur between it and the rest of the world
• What are the two main sections of the Balance of Payments (BoP)?

  • The current account: transactions related to goods/services and income transfers
  • The financial & capital account: transactions related to savings, investment, and currency stabilization
• Why is it called the Balance of Payments?

  Because the current account should balance with the capital/financial account and be equal to zero
• What happens to the capital/financial account balance if the current account balance is positive?

  The capital/financial account balance is negative
• How is money flowing into the country recorded in the Balance of Payments?

  As a credit (+)
• How is money flowing out of the country recorded in the Balance of Payments?

  As a debit (-)
• What is the significance of the Current Account in the Balance of Payments?

  • Considered the most important account in the BoP
  • Records net income from international transactions
  • Includes visible exports/imports (goods) and invisible exports/imports (services)
• What are visible exports/imports?

  Goods
• What are invisible exports/imports?

  Services
• What constitutes net income in the Current Account?

  Income transfers by citizens and corporations
• What are credits in the Current Account?

  Received from UK citizens abroad sending remittances home
• What are debits in the Current Account?

  Sent by foreigners working in the UK back to their countries
• What are current transfers in the Current Account?

  Payments at government level between countries, e.g., contributions to the World Bank
• How is the Current Account balance often expressed for international comparisons?

  As a percentage of GDP
• What defines a Current Account deficit?

  • Occurs when the value of outflows is greater than inflows
  • Usually happens when imports > exports
• What defines a Current Account surplus?

  • Occurs when the value of inflows is greater than outflows
  • Usually happens when imports < exports
• What is the UK government's macroeconomic aim regarding the Current Account balance?

  To get the Current Account balance as close to equilibrium as possible
• What is the typical trend of the UK's Current Account balance?

  It tends to run a small deficit most years
• What could help the UK achieve a positive Current Account balance?

  Export-led economic growth
• How does rising income and wealth in an economy affect the Current Account balance?

  It typically increases the value of imports
• What impact does a Current Account deficit have on aggregate demand (AD)?

  It has a negative impact on aggregate demand
• Why do net exports affect aggregate demand?

  If net exports are negative, then aggregate demand decreases
• What action could the government take to correct a current account deficit?

  Raise tariffs
• What is a likely consequence of raising tariffs on imports?

  It would likely decrease imports bought by households
• How would higher costs of production from tariffs affect consumers?

  Higher costs are likely to be passed on to consumers in the form of higher prices
• What trade-off occurs when reducing the current account deficit?

  • Increased inflation in the economy
  • The need to balance multiple macroeconomic objectives
• How has global interdependence been demonstrated in recent events?

  • Covid-19 and the Ukraine War showed how disruptions in one part of the world cause widespread problems in others
• What is the relationship between one country's imports and another country's exports?

  One country's imports are another country's exports
• What is the theoretical relationship between the global value of exports and imports?

  The global value of exports will be equal to the global value of imports
• Why is building a car considered a global effort?

  • Requires a high level of interconnectedness between multiple economies
  • A motor car has around 30,000 individual parts, often sourced globally