b.o.p

• Definition of b.o.p

  a record of all the financial transactions between UK and the international economy
• Components of the balance of payments: 

  -current account: measuring the trade in g&s, investment income, transfers

  -capital account:  Tracking capital flows in and out of the UK including portfolio capital flows (eg share transactions)  and direct capital flows (arising from FDI)
• current account definition

  A record of all the trade transactions between UK and the international economy
• current account components: goods account

  eg manufactured goods eg tractors,cars

  -trades in goods which is the: value of X - value of M

  —>negative, big deficit
• services account

  eg financial services eg banking and insurance

  -trade in services which is the:

  value of E of services - value of imports of services

  —> positive, large surplus X>M
• current account components: transfers

  -private - eg angus’s auntie in spain sends him €100

  -public - eg uk sends no. of fees to WTO

  -usually a deficit
• Net investment income (IPD)

  income from:

  -interest

  -profits

  -dividends
• current account deficit

  occurs when value of M > value of X
• current account surplus

  occurs when value of X > value of M
• capital/financial account

  record of the monetary transactions between the UK and the international economy
• capital account component: direct flows account

  -This is FDI - Cross - border investment by individuals and firms in areas such as land and capital, setting up offices/branches abroad

  Eg BMW sets up a car factory in scot.
• capital account component: portfolio investment

  Money moving from country to country to invest/buy  stocks and shares
• capital account component: other investment

  This includes:

  - flows of hot money  -money moved by investors from country to country in search of the highest interest rate

  Money lent by uk banks to overseas individuals, firms and govs
• Causes/reasons for a current account deficit 1 - 2

   High propensity to buy imported G/S

  • UK consumers tend to prefer foreign produced output
  •  In a consumer boom - acceleration in the v of  imports coming into the country

  Lack of productive capacity of UK firms - if home producers have insufficient capacity to meet demand from consumers - imports will satisfy excess demand
• Causes/reasons for a current account deficit 3-4

  Overvalued exchange rate

  –trade problems can stem from exchange rate being set at a too high level - Causes UK export prices to be higher in foreign markets whilst imports into UK become relatively cheaper

  Falling surplus in UK's trade in oil

   -for many years UK has been a major exporter of oil (from the North Sea fields)

    -Production of oil is now well past its peak-  net surplus from oil no longer contributes as much as it did to the b.o.t
• methods of reducing a current account deficit 1-2

  -Import controls -  imposing tariffs, quotas

  (any retaliation is likely to reduce exports)

   

  -Currency depreciation - involve allowing/encouraging the pound full in value against other currencies

  - This would make our X cheaper and our M more expensive – should reduce deficit

  -requires that our demand for M  and foreign demand for our X are both price elastic

   
• methods of reducing a current account deficit 3-4

  -Tighter monetary policy-  increasing the rate of interest -  reduce AMD and therefore demand for N

  (also likely to reduce  Investment, growth, employment)

   

    Tighter fiscal policy -  increasing T and/or decreasing G – should reduce AMD