Transcript The Balance of Paymentsx

A2
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analyse the causes of imbalances on the
balance of payments;
evaluate policies to correct imbalances on the
balance of payments;
evaluate the case for and against
protectionism;
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An appreciation of trends and developments
in the UK economy.
An assessment of government policies which
could be used to reduce a Balance of
Payments deficit.
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The balance of payments records all of the
many financial transactions that are made
between consumers, businesses and
governments in the UK with people across the
rest of the world.
Quick Quiz… Import or Export.
Hint: Think about the direction the money is flowing in. If Money
is flowing into the country it must be an export, if money is
flowing out, it must be an import.
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A UK citizen buying a flight to Australia with Quantas?
A British teacher working in New Zealand and sending the
money she earns home to her family.
A British bank arranging Insurance for an American
Company
Booking a guided tour around a safari park in South Africa
Getting a haircut in France
An American tourist buys a souvenir on his trip to London
Booking a holiday in a Spanish Villa
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Trade in goods includes the exporting and
importing of tangible products – for example
Cars, Crude oil, Medication mixtures, Turbo-jets,
Processed petroleum oils, Aircraft parts, Alcohol.
Trade in services includes the exporting and
importing of intangible products – for example,
Banking and Finance, Insurance, Shipping, Air
Travel, Tourism and Consultancy.
Britain has a strong trade base in services with
over thirty per cent of total export earnings come
from services. Indeed the success of our service
sector industries has been one of the strong
points in our economic performance over the last
twenty years
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Net investment income comes from interest
payments, profits and dividends from external
assets located outside the UK.
For example a UK firm may own a business
overseas and send back some of the operating
profits to the UK. This would count as a credit
item for our current account as it is a stream of
profits flowing back into the UK.
Similarly, an overseas investment in the UK might
generate a good rate of return and the profits are
remitted back to another country – this would be
a debit item in the balance of payments accounts.
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Transfers into and out of a country include
foreign aid payments. For the UK the net
transfers figure is negative each year, mainly
due to the UK being a net contributor to the
budget of the European Union. As a rich
nation, the UK makes sizeable foreign aid
payments to many other countries.
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The section that records long-term flow of
capital into and out of an economy. It
records purchases and sales of assets and is
split into two sections
1. Long-term capital flows: flows of money used for
investment in assets (direct investment by a
company setting up production or portfolio
investments through buying shares in a company
2. Short-term capital flows: flows of money that
occur to take advantage of differences in
countries’ interest rates and changes in exchange
rates; sometimes referred to as hot money
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The UK runs a Balance of Payments deficit,
meaning the UK imports more than it
exports.
The main reason why the UK imports so much
and exports so little is that imports tend to
be cheaper than manufacturing the same
good in the UK
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Strong consumer demand for imports
High income elasticity of demand for imports
A strong exchange rate
The weakness of the global economy
The availability of imports at a relatively lower price
A low rate of capital investment compared to other
countries
A relatively weak performance in terms of product
innovation
A manufacturing sector in long-term decline
Shifts in comparative advantage
UK labour is expensive
The UK has resource and weather constraints that makes
goods expensive to produce
The UK does not produce goods that people want
Competitiveness depends upon:
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Productivity
Unit Costs
State of Technology
Investment in capital equipment
Quality of design and production
R&D
Entrepreneurship
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Unemployment
Reductions in the circular flow – a net fall in
aggregate demand (multiplier)
Dip in business confidence and investment
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Reduce the costs of producing goods in the UK
A ‘Buy British’ campaign
Restrict the number of imports
Encourage capital inflows
In four groups take one of the solutions outlined
and propose a specific policy the government
could take to reduce the deficit.
Plan a 2 minute presentation explaining the
policy and the advantages and problems that
might arise from implementation. Think about
all the macroeconomic objectives in your answer
and evaluate the consequences.
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Q1. A current account deficit implies that
(Select one answer)
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(a) spending exceeds income
(b) income exceeds spending
(c) exports exceeds imports
(d) none of the above
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Q2. If there is a short-term capital outflow
out of the U.S. and into Japan, the outflow will
appear as
(Select one answer)
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(a) a debit on the U.S. current account
(b) a debit on the U.S. capital account
(c) a credit on the U.S. capital account
(d) a credit on the U.S. current account
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Q3. The record of a country's transactions in
goods, services, and assets with the rest of
the world is its
(Select one answer)
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(a) current account.
(b) balance of trade.
(c) capital account.
(d) balance of payments.
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Q4. Suppose that a Brazilian firm imports
Japanese microchips. The transaction will appear
(Select one answer)
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(a) on neither country's balance of payment
accounts
(b) as a debit on the Brazilian balance of
payments
(c) as a debit on the Japanese balance of
payments
(d) as a credit on the Brazilian balance of
payments
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Q5. The J-curve effect refers to the observation
that
(Select one answer)
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(a) GDP usually decreases before it increases
after a currency depreciation.
(b) GDP usually decreases before it increases
after a currency appreciation.
(c) the trade balance usually gets worse before it
improves after a currency appreciation.
(d) the trade balance usually gets worse before it
improves after a currency depreciation.
There are both demand side causes and supply side causes of a
deficit
DEMAND SIDE
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Economic Growth
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High Marginal Propensity to Import
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Effects of a strong exchange Rate
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Demand Side Explanations
 These are focused on AD factors i.e. the cyclical causes of a
deficit – these are mainly short term
◦ Sustained growth of AD – leading to an increased demand for
essential inputs (e.g. steel, glass, rubber, plastics)
◦ Strong growth of consumer spending (UK consumers have a
positive preference for imports!)
 Economy cannot satisfy total demand from consumers
 Imports come in to meet the ‘excess demand’.
◦ The effects of the fairly strong exchange rate in recent years
which has made imports quite cheap and our exports expensive in
world markets – leading to a slower growth of exports and faster
growth of imports
Supply-Side Explanations (structural reasons)
Low levels of output growth
Inadequate non Price competitiveness
Changing Comparative advantage in the global economy
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Side Explanations
◦ Insufficient productive capacity from British
suppliers
◦ Inadequate non-price competitiveness
◦ A research and development gap – the UK has a
smaller share of global patents than comparable
countries
◦ Emergence of new lower-cost competition for the
UK
 China, India, other Far East Asian countries
 Eastern European countries also expanding rapidly
Negative Impact on AD
Negative impact on company profits and business confidence
Unemployment in affected industries
Government finances affected
Worsening of the North-South divide
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Short-term boost to consumers living
standards
Deficit might be due to increased
imports of capital goods, which could be
useful in shifting the LRAS curve
Deficits may be reflective of economic
growth
Current account deficit not all bad if
finance by current account surplus
The size of the deficit expressed as a percentage of national
income (GDP) has actually been increasing in the last three
years – it is now 5.7% of GDP.
Our trade balances will improve if
 UK businesses successfully improve their cost and price
competitiveness
 The exchange rate depreciates to provide the export sector
with a competitive boost
 The UK manages to take advantage of a forecast acceleration
in the rate of growth of world trade in the next few years
Expenditure reducing policies
Policies to reduce levels of demand in the economy.
 High interest rates,
 High marginal taxes
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Policies to improve supply
 Supply-side reforms designed to raise productivity and reduce
labour costs
 Improved non-price competition
 Investment in new growth sectors
Expenditure switching policies
Policies to encourage consumers to buy less from abroad
 lower exchange rates. This should reduce demand for imports as
they become more expensive as long as demand is not inelastic
 Achieving a period of low relative inflation
 Increase protectionist policies
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Competitiveness depends upon:
- Productivity
- Unit Costs
- State of Technology
- Investment in capital equipment
- Quality of design and production
- R&D
- Entrepreneurship
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http://www.economicshelp.org/blog/5776/trade/ukbalance-of-payments/
Using the website link above and your textbook to show
judgment about a range of policies available to a government
to correct a deficit. Each policy or method may have different
impacts and several may have constraints upon their use
Choose two policies and analyse in detail how they may
correct a deficit. Evaluate your analysis – consider costs,
timescales, scope of impact, range of impact and what overall
effectiveness may depend upon