Balance of payments 1

• What is meant by the balance of payments?

  It records all money flows between countries
• Why is it called the balance of payments?

  Money flowing in and out must balance
• What are the components of the current account?

  Trade in goods, services, primary and secondary income
• What are the three sections of the balance of payments?

  Current Account, Financial Account, Capital Account
• What is recorded in the capital account?

  Transfer of assets by individuals
• What does the financial account include?

  Transactions in financial assets and investment flows
• What does an imbalance on the balance of payments indicate?

  There is a surplus or deficit in an account
• What does a surplus on the balance of payments mean?

  More money flows into the country than out
• What does a deficit on the balance of payments mean?

  More money flows out of the country than in
• How do you calculate the balance on the balance of payments?

  Inflow - Outflow of money
• What must happen if there is a deficit on the current account?

  There must be a surplus in financial and capital accounts
• What is the trade balance?

  Total exports of goods minus total imports
• What is the trade balance in the UK typically?

  It is nearly always negative
• What does the trade in services section record?

  All trade in services, also known as invisibles
• What percentage of services are potentially tradable in the UK?

  About 20%
• What is the typical balance for the trade in services in the UK?

  The UK traditionally runs a large surplus
• What does primary income record?

  Interest, profit, and dividends from investments
• What can cause fluctuations in primary income?

  The state of the economy where businesses are based
• What are current transfers in the balance of payments?

  Payments made to or from other countries
• What are the main transfers included in current transfers?

  Payments for EU membership and foreign aid
• What is the typical balance for current transfers in the UK?

  The UK typically runs a deficit
• What are some causes of a trade in goods deficit?

  High demand for imports and decline in manufacturing
• What is a consequence of a trade in services surplus?

  The UK is more competitive in service provision
• What can cause imbalances in primary income?

  Economic conditions where businesses are based
• What is a cause of a current transfers deficit?

  UK government spending on overseas aid
• Why is a sustainable balance of payments important?

  It indicates competitiveness and economic health
• What can a persistent current account deficit indicate?

  Spending too much on imports, not enough exports
• What might a deficit suggest about consumer behavior?

  Low savings ratio and high consumer debt
• What is the effect of depreciation of the exchange rate?

  It makes exports more price competitive
• What is a potential problem of currency depreciation?

  Increased price of imports may arise
• What are expenditure-reducing policies?

  Policies to reduce demand for imports
• What are the components of the current account?

  1. Trade in Goods
  2. Trade in Services
  3. Primary Income
  4. Secondary Income
• What are the components of the balance of payments?

  • Current Account
  • Financial Account
  • Capital Account
• What are the causes of a trade in goods deficit?

  • High demand for imported consumer goods
  • Decline in UK manufacturing sector
  • Uncompetitiveness in non-price factors
  • Lower production of primary materials
  • Strong currency making imports affordable
• What are the causes of a trade in services surplus?

  • Growth of the tertiary sector
  • Increased competitiveness in service provision
  • London as a prime financial center
  • Strong reputation in management consultancy and law
• What are the consequences of a UK deficit?

  • Sign of an unbalanced economy
  • Reliance on imported goods
  • High propensity to consume imports
  • Concentration of wealth in the South East
  • Rising property prices in London
• What policies can correct imbalances on the balance of payments?

  • Control consumer spending
  • Invest in supply-side improvements
  • Depreciate the exchange rate
  • Improve overall macroeconomic conditions