Balance of Payments

• What is the definition of globalisation?

  Globalisation is the process of countries becoming more interdependent and more integrated.
• What are the key aspects of globalisation?

  • trade to GDP ratios are rising for most countries
  • big expansion of Financial Capital Flows between countries.
  • rise in Foreign Direct Investment and Cross Border M&A (mergers and takevovers)
  • rise of global brands - including many from emerging countries
  • deeper specialisation
• What is the definition of the balance of payments?

  Records all financial transactions of a country. It shows the receipts from trade.
• What is meant by inflows of foreign currency?

  They are counted as a positive entry (e.g. exports sold overseas).
• What is meant by outflows of foreign currency?

  They are counted as a negative entry (e.g. imported goods and services)
• What are the 3 components of the balance of payments?

  • current account
  • capital account
  • financial account
• What is the account that we need to know in detail?

  The current account.
• What are the items in the current account of the BOP?

  • net trade balance in goods
  • net trade balance in services
  • net money transfers
  • net investment income from overseas assets
• What is to be included in the net trade balance of goods?

  • finished manufactured goods, components, raw materials
  • energy products, capital technology
• What is to be included in the net trade balance of services?

  • banking, insurance, consultancy
  • tourism, transport, logistics
  • shipping, education, health
  • research cultural arts
• What is included in the net money transfers?

  • overseas aid/debt relief
  • private money transfers e.g. from migrants
• What is included in the net investment income from overseas assets?

  • profits, interest and dividends from investments in other countries e.g. the profits from transactional businesses.
• What is a surplus in the current account?

  A surplus is when the value of exports of goods, services, investment income and transfers is greater than imports.
• What is a deficit in the current account?

  A deficit is when the export of goods, services and investment income and transports is less than imports.
• What is SPICED?

  Strong

  Pound

  Imports

  Cheaper

  Exports

  Dearer
• What is WPIDEC?

  Weak

  Pound

  Imports

  Dearer

  Exports

  Cheaper
• What are some worries with a current account deficit (part 1)?

  • foreign investment will lose confidence in investing in our economy.

  . However, we have the financial sector to fall back on.

  • displays signs of over-reliance so in a crisis where we cannot import from other countries, we are isolated and will struggle producing for ourselves.

  . However, if a weather cries happened, it may not affect the production of goods in our economy to the same extent as other countries.
• What are some worries with a current account deficit (part 2)?

  • lack of demotic comfort to fall back on

  . However,

  • can be a sign of uncompetitive, which leads to lower economic growth and poorer prospects in the long run

  . However, could grow wealth in the long run if we invest in overseas assets intelligently.

  • if it keeps growing over time, it could become unsustainable and harder to finance

  . However, it can also be financed by long-term investment, which improves productive capacity.
• What are some worries of a current account deficit (part 3)?

  • it is a sign of an unbalanced economy (too specialised)

  . However, in an era of globalisation, financial flows are easier to attract and therefore, the deficit is financed by these capital inflows.

  • foreigners have greater claim on domestic assets

  . Domestic country may benefit from this e.g. Chinese investment in Africa.
• What are some worries with a current account deficit (part 4)?

  • it may indicate unbalanced economy - focused on short-term consumption rather than long term investment in export sector.

  . However, a current account deficit can enable the economy to have higher standards of living.

  • large deficit could cause depreciation in exchange rate and cost-push inflation.

  . However, a moderate depreciation would help restore competitiveness.
• When does a current account deficit tend to increase and why?

  In the uk, a current account deficit often increases after a period of economic growth. This is because Higher economic growth leads to higher consumer spending and therefore, more spending on imports.
• What are some effects of a current account deficit?

  • leakage from the circular flow - AD diminished
  • may cause a depreciation in the exchange rate
  • foreigners will own more domestic assets
  • sign of uncompetitive exports
  • enables higher levels of consumption

  This depends on the situation.
• What does the term ‘current account of the balance of payments mean’?

  The total value of exports minus the total value of imports in one year.