Balance of payments

• What does the balance of payments record?

  Economic transactions between residents and the world
• What is recorded in the current account of the balance of payments?

  Transactions involving export or import of goods and services
• What are trade in goods?

  Exports and imports of tangible items
• Give examples of trade in goods.

  Cars, oil, and tea
• What does trade in services include?

  Exports and imports of intangible products
• What is primary income in the balance of payments?

  Income from UK nationals and firms abroad
• What is secondary income in the balance of payments?

  Transactions between governments and remittances
• What does the capital account record?

  All capital transfers in the balance of payments
• What is the financial account composed of?

  Foreign direct investment, portfolio investment, other investments
• What is the policy objective of a sustainable balance of payments position?

  Maintain sufficient income despite current account deficits
• What can indicate international incompetitiveness?

  A current account deficit
• What factors determine international competitiveness?

  Price and non-price factors
• What are some causes of imbalances on the balance of payments?

  Changes in economic activity, exchange rate, inflation
• What are some consequences of imbalances on the balance of payments?

  Unemployment, slower GDP growth, currency weaknesses
• What factors affect the risk of financing a trade deficit?

  Reliance on trade, flexibility of industries, J-curve effect
• What is the difference between internal devaluation and exchange rate devaluation?

  Internal reduces AD; exchange rate lowers export prices
• What are the components of the balance of payments?

  • Current account
  • Capital account
  • Financial account
• What are the strengths and weaknesses of a current account deficit?

  Strengths:

  • Can indicate investment opportunities
  • May reflect strong domestic demand

  
  

  Weaknesses:

  • Risk of increased borrowing
  • Potential for currency depreciation
• What are the implications of a trade deficit?

  • Increased reliance on foreign capital
  • Potential for economic instability
  • Need for policy adjustments
• What are the factors influencing international competitiveness?

  • Cost of production
  • Quality of goods and services
  • Innovation and technology