A record of all of an economy‘s financial transactions with the rest of the world.
How are money flows recorded?
Inflows-outflows
What happens if outflows>inflows?
Deficit
What happens if inflows>outflows?
Surplus
What are the three financial transactions categorie?
The current account
The capital account
The financial account
What are the 4 main sections of the current account?
Trade in goods
Trade in services
Primary income
Secondary income (transfers)
What is a trade in goods also known as?
Visible trade
What is a trade in services also known as?
Invisible trade
What is primary income?
Income flows that arise out of cross-borderlending and investment.
What do primary income come from?
Profits - of multinational companies that that are repatriated
Dividends - from shares bought in other countries
Interest - paid on cross border loans or earned on foreign governments’ bonds
What is secondary income?
Transferred occur when money changes hand without any economic transaction taking place
Give examples of secondary incomes
Aidflows - governments and charities may give money to other country’s governments and organisations to help their economic development.
Remittances - immigrants may send some of their earnings back to their families in other countries
What is the capital account?
The transfers of capital by domestic and foreign governments.
It also records the purchase and sale by firms and other organisations of intangible fixed assets such as patents trademarks and copyright
What is a long term capital flow?
Foreign direct investment
Capital movements
Borrowing
What is inward investment?
Inflow of money, but will be followed by outflows later on as income streams from the investment are sent back to the nation from which the investment originated (repatriated profits)
What is outward investment?
although an outflow of money, it will eventually generate an inflow or money in the form of investment incomes (eg profits or dividends)
Give an example of inward investment?
The money for the nissan car plant in Sunderland was sent from Japan (credit).
Give an example of outward investment
uk firms building plants abroad
Give two examples of capital movements - portfolio investments
Uk pension fund buying shares in a US company on Wall Street (debit) - outflow
A US insurance firm buying shares on the London Stock Exchange (credit) - inflow
What is a short term flow of the financial account?
Short term investment funds that flow around the global economy looking for the best return (hotmoney)
Speculative buying of currency
Why does the BoP always balance in a floating exchange rate?
The exchange rate will automatically adjust until inflows are equal to outflows
Why does the BoP always balance in a fixed exchange rate?
the balance is brought about by government intervention in currencymarkets and/or changes to interest rates