Balance Of Payments

• What is the balance of payments?

  A record of a country’s money flows
• What is the current account in the balance of payments?

  It records trade, profits, and transfers
• What are the components of the current account?

  Trade in goods/services, profits, transfer payments
• What does an equilibrium on the current account mean?

  Outflows equal inflows of money
• What happens if the current account is in deficit?

  The overall balance of payments is also in deficit
• Why does the government want to avoid a current account deficit?

  To maintain financial stability and equilibrium
• How does a current account deficit impact aggregate demand?

  It leads to negative net exports, reducing AD
• What is the relationship between consumption and aggregate demand?

  Consumption makes up about 60% of AD
• What could counteract a falling trade in goods/services?

  Surpluses in profits and income payments
• How does a current account deficit affect the exchange rate?

  It increases the supply of pounds, lowering value
• What happens when the value of imports exceeds exports?

  Current account deficit occurs
• What does a weak pound imply for imports?

  Imports become more expensive (SPICED)
• How can a weaker pound affect UK exports?

  It makes UK exports more competitive
• What role do interest rates play in the exchange rate?

  Higher rates can strengthen a weak pound
• What is considered a sustainable current account deficit?

  Less than 5% of GDP
• What causes a current account deficit fundamentally?

  Outflows exceed inflows of money
• How does international non-price competitiveness affect exports?

  Lower quality goods lead to fewer exports
• What can cause international price competitiveness issues?

  High inflation and strict regulations
• How does a strong pound affect foreign purchases?

  It makes UK goods less attractive to buy
• What is a high propensity to import?

  Consumers prefer foreign goods over domestic
• Why might UK firms import goods instead of producing them?

  Domestic firms may not meet consumer demand