Transcript Current Account Balance of Payments

Balance of
Payments
Exports and Imports
Balance of Payments
• A record of all financial dealings between
economic agents of one country and the rest of
the world.
Trade in goods
• Visible or tangiable goods such as shoes, copper,
rice, cars and spaceships.
• Export minus imports of goods = balance of
trade
Trade in services
• Invisible or intangiable services – banking,
insurance, call centres and tourism.
Income
• In this context, income includes profits,
dividends and interest earned abroad.
• So, a British woman earns interest on her Swiss
bank account.
• Dividends paid to a Swiss businessman on
shares held in the New York stock exchange.
Current transfers
• Current transfers are payments with nothing
received in return.
• These include workers' ………………..,
international aid and contributions to
international organisations.
Current Account Balance of
Payments
• When we consider invisible goods, visible
goods, income and current transfers we get the
Current Account
Balance of
Payments.
USA
Switzerland
Russia
Greece
Ireland
Likely factors contributing
to a deficit.
 1.
Overvalued ………………….
2. International trade is not
football.
 2.
Lack of economic growth in main
trading partners – especially if you export
…................. goods.
 3.
Rapid economic growth in your
domestic economy.
 4.
Have not yet managed to expand their
market to include the ………. Economies.
The UK is lagging behind France, Italy,
Switzerland and Germany in this respect.
 5.
The UK spends less proportionally on R
and D than their main rivals – the US,
Germany and even France. In the long
run this results in less investment, less
innovation and fewer goods and services
that the rest of the world want to buy.
 5.
Other supply side shortcomings.
Problems…
 High
CABofP deficit
A deficit is effectively supporting foreign
………
A
deficit means your currency gets
……………, this results in
……………………………. getting more
expensive.
A
country with a deficit may appear
uncompetitive and structural weak and
therefore may have difficulty attracting
FDI.
High CABofP surplus
 Generally
this is good.
 1. boost jobs and economic growth
 2. allows a country to build up foreign
reserves of currencies.
However…..
 It
is very bad for a country’s carbon
emissions per capita. The manufacturing
of a toaster which will be bought and
used in the USA will negatively affect
China’s carbon emissions.
Also….
A
large current account surplus can lead
to diplomatic tensions
And
A
large surplus can mean that there are
domestic shortages.
Current Account Balance of
Payments
• The CABofP is made up of millions and
millions of transactions. Both government and
private payments are included.
• So, it is not a good economic answer to say
something like – ‘the government should stop
buying goods from abroad’. The government
does not decide whether Mr and Mrs Smith but
a British, German or Japanese car.
Deficit or surplus?
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Kuwait
Germany
Switzerland
Ireland
China
Australia
United Kingdom
Deficit or surplus?
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Kuwait
China
Switzerland
Ireland
USA
United Kingdom
Germany
+ 42%
+ 1.7%
+ 10%
+ 1.8%
- 3.2%
- 2.4%
+ 6.2
Deficit or surplus.
• Some useful things to know.
• 1. China, for the last fifteen or so years, has been
running a huge surplus in dollar terms.
• 2. The USA on the other hand, has been
running a huge deficit in dollar terms.
• 3. Britain runs a deficit in goods, a surplus in
services but overall the British CABofP is in
deficit.
Buy British Campaign
Current Account Balance of
Payments
• A deficit of the Current Account Balance of
Payments (also known as a trade gap) is not
regarded as a huge economic problem. It is not
nearly as serious as the twin evils of inflation and
unemployment.
India’s Growth
India’s Current Account
Factors affecting the current account
balance of payments
• Exchange rate
• Inflation. If inflation is higher in Spain than in
France, Spain`s costs will be higher and Spanish
goods will be more expensive (and less
attractive) than French goods.
• Aggregate demand.
Questions
• Contrast the balance of goods and services. (7)
• Why have current transfers been negative? (3)
• Any connection between currency`s value and
Current Account Balance of Payments? (6)
• Supply side shock affect Current Account
Balance of Payments? (5)
• Is the trade gap a worrying problem for the UK
economy? (8)
Balance of Trade – visibles- - goods
Balance of Trade – invisibles services
Top trading partners
What the UK exports
BRIC
• Outline the three components of
the Current account Balance of
Payments.
• Evaluate the likely
effect on the UK`s
current account of
the balance of
payments of
changes in the
exchange rate in
the pound as
shown opposite.
Euro
US$
2004
1.43
1.90
2005
1.46
1.74
2006
1.48
1.95
2007
1.41
2.01
2008
1.15
1.52