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1 - Balance of Payments - Coggle Diagram
1 - Balance of Payments
Components of the Balance of Payments
Current Account
Trade Balance
Trade in Goods
Trade in Services
Income Balance
Investment Income
UK workers abroad bringing money back
Transfers
Payment of Fees (EU) and Aid
In the UK
Goods = M >X = Negative (Largely)
Services = X > M = Positive
Income = Positive
Transfers = Negative
Overall, Negative ∴ Deficit
Capital Account
Very small part of the balance of payments
Debt Forgiveness
Inheritance Tax
Death Duties
Sale of Tangible Assets
Sale of Intangible Assets
Net Errors and Omissions
Balancing Tool used to help ensure the account is balanced
Financial Account
Second Largest Part of the BOP
Portfolio Investments
Buying or selling of financial assets such as bonds/ shares and derivates like options or swaps
Foreign Direct Investment (FDI)
Reserves
Gold or Currency
Deficit or Surplus
Why does it matter
Effects of Trying to Solve them
Deficit
Causes
Demand Side
Strong Domestic Growth
Recession Overseas
Strong Exchange Rate (SPICED)
Supply Side
Low Investment
Low Productivity
High Relative Inflation
High ULC
Poor Quality or Reliability
Depletion of Resources
Consequences
Lower AD (X-M)
Structural Unemployment
International Debt
Fall in the Value of the pound sterling
Surplus
Causes
Demand Side
High Incomes Abroad
Low incomes at home
Weak Exchange Rate
Supply Side
Low Relative Inflation
Low ULC (Unit Labour Costs)
Strong Investment
Gain in comparative advantage
New resource discoveries
Consequences
Inc (x-m) ∴ inc AD ∴inc Growth ∴ dec unemployment ∴ inc Inflation ∴ Demand Pull inflation?
Appreciation in the exchange rate
Financial Account Deficit
Could Harm International Relations ( if artificial advantages are used)
Sign of an unbalanced economy?
Too reliant on exports?
Not enough domestic consumer spending
No other routes for growth if exports decrease?
Factors influencing the current account
Levels of Investments
Leading to a comparative advantage
Levels of Inflation
(when compared to trading partners)
MPS (Marginal Propensity to Save) and MPM ( Marginal Propensity to Import)
Relative Levels of Capital and Labour Productivity
Economic Performance of Trading Partners
Current Account Balancing Policies
Expenditure Switching
Policies that aim to switch spending away from buying imports and to domestic goods and services
Forms
Protectionism
Quotas
Embargo
Domestic Subsidies
Tariffs
Non Tariff Barriers
Evaluation
Risk of Retaliation
WTO Rules
Inflationary?
Higher Prices for consumer
Loss of Efficiency
Comparative Advantage?
Weaken the Exchange Rate
Reduce Interest Rates
Increase the money supply
Sell domestic currency reserves
Evaluation
Is the Marshall Lerner Condition Met?
Elasticity of demand for X and M
If PED of Net X&M is less than 1, than the weaker the exchange rate will not improve the current account deficit but will make it worse
In the short run it doesn't hold and the current account will worsen before it improves because of time lags and adjustments for businesses
J - Curve
Inflationary?
Risk of Retaliation
Supply Side Policies
To boost international competitiveness
Change Price
Change Quality
Evaluation
Time Lags - Lon Run Policy
Cost and Opportunity Costs
No Guarantee of Success
Are Supply Side Policies Targets Correctly?
Expenditure Reducing
Policies that aim to reduce the amount of spending on imports by trying to reduce AD, reduce income in the economy and reduce MPM
Forms
Contractionary Monetary Policy
Increasing Interest Rates
Restrict Money Supply
Contractionary Fiscal Policy
Increasing Taxes (Income, VAT , National Insurance)
Decreasing Government Spending
AIM: To reduce AD, shift AD to the left and reduce M
Evaluation
Conflict of Objectives
Growth
Unemployment
Inflation
If economic confidence is so high, will the policy actually shift AD left?
Level of the output gap, if the economy is already at full employment and AD shifts less then incomes may not decrease
MPM must be considered
Overall Evaluation
Protectionism
Retaliation
Use of policy to measure leading to unintended consequences
Consequences of Investment in other countries
Recipient
Pros
Injection to Circular Flow
Increase in AD
Increase in Capital Stock
Finance Current Account Deficit
Skills / Tech Transfers
Cons
Offshoring of dividends and profit
Risk of Financial Flight ( Rapid Stock Withdrawal)
Increase Debt Burden
Used to gain know how, strategic assets or raw materials
Investing Economy
Pros
Source of Diversified Revenue
Gain Strategic Assets overseas
Cons
Inflows of Profit / Dividends recorded on current account, adding to surplus