Transcript current account

2.3.1 Unit content
Students should be able to:
• Define balance of payments and the key components
(the current account, and the balance of trade in
goods and services)
• Analyse current account deficits and surpluses
• Assess the causes and costs of an imbalance in the
current account
• Analyse the relationship between current account
imbalances and other macroeconomic objectives
• Evaluate the interconnectedness of economies
through international trade
International competitiveness
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Most economies are involved in trading with
other countries and are involved in exporting
(selling goods or services to a foreign country
which generates income for the home country)
and importing (buying goods from abroad
which leads to expenditure for the home
country)
So they need to be competitive in order that
overseas customers will buy. This will depend
on inflation as well as productivity.
Balance of payments
The balance of payments (BOP) records all
financial transactions made between
consumers, businesses and the government
in one country with other countries.
 It can be split into two parts:
‘Current account’ and the ‘Capital and financial
accounts’.
For the syllabus we just look at the current
account.
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Current account
The current account records payments for the
purchase and sale of g______ and s_________,
investment income and transfers.
 The capital and financial accounts record the
flow of finance between the UK and other
countries e.g. money associated with saving,
investment, and currency dealings.
For the syllabus we just look at the current account.
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The two parts of the current account
The current account is split into:
 Visibles – imports and exports of _______
 Invisibles – imports and export of _________
and investment income
Visible exports result in goods leaving the UK and
money entering the UK. This is shown as a
____________ on the balance of payments
account.
What are the main exports for the UK?
Who are our main export partners?
The United Kingdom mainly exports:
Main export partners are:
Visible imports and the balance of trade
Why are visible imports shown as a negative?
Because
If I go on holiday abroad then this is recorded as
an import because
What does the UK import?
The difference between visible exports and
visible imports is known as the balance of trade
Invisible examples
How would a British worker in France
sending money back to the UK be classified?
How would a French firm sending profits
back to France be classified?
The balance on invisible trade and the
current balance
The balance on invisible trade or net
invisibles is the difference between
invisible ________ and invisible ________
 The current balance is the difference
between total _______ (visible and
invisible) and total imports

More details on the current account
The current account consists of four items:
1. Trade in goods
2. Trade in services
3. Investment income: interest, profit and
dividends from investments abroad. It does
NOT include the flow of investment funds.
4. Transfers: tax payments to foreign
governments, payments to British military
personnel abroad, money migrants send home
Current account deficits
How can a household have a deficit?
How will it manage?
Similarly the British economy can have a current
account deficit if it ______ more than it _______
In this case it must ______ money from overseas.
It will have to run a surplus on its capital account.
What causes a current account deficit?

The c___________ is too strong relative to other
countries. E.g. if £1 was $1 but then £1 = $2 then
High rates of i_______ relative to other countries
 High w_______ costs relative to other countries
 High level of g__________ in a country, as
people with higher incomes tend to buy more
imports from abroad
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UK Current account
The UK has had a persistent current account
__________ in the past 15 years.
This is caused largely by the:
In Q2 2015, the UK’s current account ______
was £_____ billion (3.6% of GDP)
This is lower than previous current account
deficit of 5.2% in Q1 2015.
Current account surplus
How can a household have a surplus?
How can the economy have a current account
surplus?
In this case it will run a deficit on its capital and
financial account.
Summary of current account surpluses
Remember a current account surplus on the
balance of payments occurs when more money
is flowing into the country than is flowing out.
A country such as _______, which exports a large
number of high-value goods, has a surplus on the
current account, meaning that more money flows
in than flows out.
A country with a high standard of living but which is
less successful in exports may run a deficit e.g.
What causes a current account surplus?
Are current account deficits ‘good’ or ‘bad’?
A current account deficit may be a sign of poor
economic management or economic weakness.
However, if the deficit is small in relation to the size
of the economy then it is of little economic
significance.
Similarly if an economy has a large current account
deficit but then has a large current account surplus
the following year, then this is not really a problem.
A current account deficit only matters if __________
_________________________________________
Large, sustained current account deficits
A large and sustained current account deficit is
unsustainable in the long run as foreign lenders will
eventually think that the country will be unable to
pay its debts.
Lenders will then _______ lending.
This happened to Brazil in the 1980s and Thailand
in the 1990s
How can a country reduce its current account
deficit?
It needs to _______ more and/or ________ less.
The local population will have
Increasing interest rates and/or increasing taxes
will ______ domestic consumption.
This will _________ inflation (lowers demand pull
inflation) and make local goods and services
__________ to buy abroad.
When might a large, sustained current
account deficit be beneficial?
When the economy is growing at a faster rate.
E.g. if an economy is growing at 10% a year and
its current account deficit is 4% then the country
will be able to pay since the debt is ___________
slowly than the economy.
However if its economy was growing at 1% then
it will have problems.
Large, sustained current account surplus
If an economy has a large, sustained current
account surplus it is __________ more than it is
_______________
This means that their net foreign wealth is
increasing.
This money may be used at a later date, rather as a
household may save now for later.
E.g. J______ has a current account surplus but this
will be needed to pay for its _______ population.
Drawbacks of a large, sustained current
account surplus
WARNING: Budget deficit
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When the government is running a budget
deficit, it means that in a given year, total
government expenditure exceeds total tax
revenue. In your textbook they refer to this as
the PSNCR = public sector net cash
requirement.
Note that this is NOT the same as a current
account deficit since the current account deficit
is created by firms and individuals (as well as
the government)
Current account and interest rates
We look at this in more detail later.
 Briefly, when the interest rate rises in the UK,
the exchange rate usually does too (e.g. £1 = $1
then £1 = $2).
 This means that __________ become more
competitive (cheaper) and _________ become
less competitive (more expensive).
 Hence the current account deficit will worsen