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Reading 4: Economic & financial flows in a globalised world (Balance…
Reading 4: Economic & financial flows in a globalised world
Balance of payments
Economic indicator
Tracks transactions between a country & rest of world during specified time period
3 Main parts
Current Account
Imports/Exports
Incomes & Transfers
Capital Accoun
t
Transfers of capital
Financial Account
Financial inflows
Claims on or liabilities to non-residents re financial assets
Direct investments
Portfolio investments
Reserve assets
ACCOUNT MUST BALANCE
Helps to understand comparative position of one country to another
Surplus & Deficits Deficit = borrowing
Global imbalances
Risk of disruptive adjustments
Threat of instability to global economy
European Commission (2016)
Maintain balances at sustainable levels
CORRECTIVE ACTION
Adjustment by market forces
Government intervention
Stimulating export industries
Exchange rates
Exercise 1
Global imbalances - falling oil price
Eurozone surplus
Surplus = extra savings
Failure to spend incomes = surplus. Deficit countries obliged to borrow &/or sell assets to reduce spending.
Deficient aggregate demand = reduced GDP & possible recession
Surplus countries
China & Asian markets
OPEC countries
Protection against depleting oil reserves
Russia, Norway, Switzerland & Japan
Exports > Imports
Deficit countries
UK & USA
Large imbalances built-up in mid 2000s
Why?
1997/8 Russian/Asian financial crisis
#
Rise in international oil prices
Transfer of power & income from oil consumers to oil producers
#
#
Reaction?
Policy of high national net saving by keeping currencies artificially low
Substantial current a/c surplus
Led to economic weakness - Western countries
Reacted by running ultra-loose monetary policies
2007/8 financial crisis
Current Picture
USA deficit halved
Major reduction in large current a/c surpluses around world
Japan's surplus now zero
China's surplus halved
Falling oil prices
Energy efficiency
Increased supply
Eurozone
Substantial combined surplus
Worldwide depressed aggregate demand
Seeking to export out of economic weakness
UK affected
