Balance of payments

• What does the balance of payments measure?

  The balance of payments measures all the currency flows in and out of a country in a particular time period.
• What is one part of the balance of payments?

  One part is the current account, which measures the value of imports and exports.
• How does a strong pound affect imports and exports?

  A strong pound makes imports less expensive and exports more expensive.
• How does a weak pound affect imports and exports?

  A weak pound makes imports more expensive and exports less expensive.
• How does economic growth affect the balance of payments?

  Higher economic growth can lead to increased consumer spending and a rise in import spending, causing inflationary pressures.
• What does adjusting for 'Purchasing Power Parity' help with?


  It helps to solve issues related to cost of living differences
• What does Purchasing Power Parity (PPP) do?


  It equalizes the price of internationally traded goods across countries
• What is arbitrage in the context of exchange rates?


  Buying goods in a cheaper country and selling them in another for profit
• What happens to prices and exchange rates over time due to arbitrage?


  They tend to align as demand increases in the cheaper country
• What is a benefit of using PPP exchange rates?


  They remain fairly constant year-round for easy comparison
• How can knowing the PPP help in economic analysis?


  It allows tracking and predicting exchange rate relationships
• How can PPP assist in examining living conditions?


  It helps to compare relative living conditions of different countries
• What is the goal of price stability in government policy?


  To keep inflation low and stable.
• What is the Gini Coefficient?


  A measure of inequality.
• What do governments try to improve regarding the current account?


  International competitiveness.
• What does a positive trade balance indicate?


  Exports exceed imports.
• How does higher productivity affect efficiency?


  The higher the productivity, the more efficient it is to make goods and services.
• What does PPP stand for


  Purchasing power parity
• What does purchasing power parity mean


  Purchasing power parity is when a good is cheaper in one country than another
• Balance of payments


  A record of a country's trade/transactions with the rest of the world
• Three sections of the Balance of Payments

  • The current account
  • The financial account
  • The capital account
• Components of the current account

  • Trade in Goods
  • Trade in Services
  • Investment Income (Primary Income)
  • Transfers (Secondary Income)
• Trade in Goods


  Measures the net exports (X - M) of visible goods
• Reasons for UK's trade in goods deficit

  • Increase in the demand for consumer goods, many of which have to be imported
  • Decline in the UK manufacturing sector as secondary production is outsourced to low wage economies
  • Lower production of primary materials such as gas and oil
  • UK now imports significant quantities of primary materials from other countries
• Stronger pound


  Imports cheaper, exports dearer
• Weaker pound


  Imports dearer, exports cheaper
• Trade in Services


  Measures the net exports (X - M) of invisible items e.g. banking, insurance and tourism
• Trade in servics surplus


  Where a countrys exports exceeds its imports
• Trade in services defecit


  Where a countrys imports exceed its exports
• Reasons for UK's trade in services surplus

  • UK has seen a shift away from primary and secondary sectors towards tertiary sector employment, thus specialising in the provision of services
  • This specialisation has meant that the UK is more competitive in the provision of these services, and can offer better services at lower cost
  • London has developed as one of the world's prime financial centres and become a major source of income and wealth generation in the UK
• Investment Income (Primary Income)

  Generated by UK owned overseas assets e.g. a UK firm might own a company abroad, or generate income from overseas investments
• Transfers (Secondary Income)



  Payments made (or received), usually by the government, to or from other countries
• Main transfers


  • Payments for membership of the European Union
  • Foreign Aid
• Four key ways that have led to globalisation

  • The proportion of output of an individual economy which is traded internationally is growing
  • More people (or companies) own assets in other countries such as shares, loans or businesses
  • Increasing migration between countries
  • More technology being shared on a faster basis
• Globalisation


  Globalisation is when business expand abroad and sell their goods/ services in more than one country
• Capital account



  Records international transactions that are minor in nature, such as debt forgiveness, inheritance taxes, transfer of financial assets by migrants, and sales of tangible and intangible assets
• What is the definition of an exchange rate?


  The price of one currency expressed in terms of another
• What is an example of an exchange rate?



  £1 = €1.25
• What does currency refer to?


  The system of money in general use in a particular country
• How can the value of currency change in different countries?


  The value can rise and fall based on various economic factors