2.1.4 Balance of payments
What are the components of the current account
balance of payments?
records trade in goods,
services, investment income
+ current transfers
balance of trade
difference between value
of goods & services
exported + value of
goods & services
imported
may be split into balance
of trade of goods +
balance of trade of
services
primary income/investment
income
net earnings on
investments in other
countries (interest, profit
+ dividends)
secondary income/current
transfers
net payment of money
across international
boundaries that has no
corresponding output
payment to EU
economic migrants
sending income back to
family
2.1.4 Balance of payments 1
, current account deficits +
surpluses
surplus - exports >
imports
deficit - imports >
exports
financial + capital accounts
financial account records
money flows for investment
purposes
foreign direct investment
(buying out assets +
ownership of companies
in other countries)
foreign portfolio
investment (speculative
movement of money
between countries as
exchange rates + interest
rates change)
capital account puts the
other two accounts in
balance by recording
changes in net assets in each
country, as well as errors +
omissions
What are the causes of a current short term
account deficit?
too much AD (due to
consumer-led boom or
excessive government
spending)
overvalued exchange rate
SPICED
2.1.4 Balance of payments 2
, high inflation relative to main
trading partners
recession in main trading
partners
long term
low productivity
decline in quality/reliability of
exports
What is the relationship between balance of payments deficit is not
current account imbalances + other a problem as long as can be
macroeconomic objectives? funded (can be a sign that living
standards are rising)
becomes a problem when
reserves of foreign currencies
begin to run low → may lead to
currency falling in value →
inflationary
may be a sign that country is
becoming uncompetitive →
unemployment in domestic
economy
How can current account imbalance tax increase → reduce spending
be solved? on imports
cuts in government spending
(likely to cause slowdown in
economic growth)
How are economies interconnected international trade → countries
through international trade? interdependent → rely on each
other for income, resources +
goods/services
2.1.4 Balance of payments 3
, ∴ if one country or area suffers weak
demand → direct effect on other
countries
interconnectedness becomes a
problem when deficits/surpluses
on current account become
persistent (current account
imbalance)
countries have become net
exporters/importers due to
deindustrialisation of western
countries
What are causes of current
account imbalance?
country spending too much
not producing anything that
customers abroad want to
buy
stage of business cycle
strength of currency
loss of competitiveness in
manufacturing sector (most
significant UK factor)
costs of current account
imbalance only become
significant if the deficit/surplus is
unsustainable
What can persist deficit lead to?
value of currency falls →
uncompetitive
government may buy its
currency on foreign
2.1.4 Balance of payments 4
What are the components of the current account
balance of payments?
records trade in goods,
services, investment income
+ current transfers
balance of trade
difference between value
of goods & services
exported + value of
goods & services
imported
may be split into balance
of trade of goods +
balance of trade of
services
primary income/investment
income
net earnings on
investments in other
countries (interest, profit
+ dividends)
secondary income/current
transfers
net payment of money
across international
boundaries that has no
corresponding output
payment to EU
economic migrants
sending income back to
family
2.1.4 Balance of payments 1
, current account deficits +
surpluses
surplus - exports >
imports
deficit - imports >
exports
financial + capital accounts
financial account records
money flows for investment
purposes
foreign direct investment
(buying out assets +
ownership of companies
in other countries)
foreign portfolio
investment (speculative
movement of money
between countries as
exchange rates + interest
rates change)
capital account puts the
other two accounts in
balance by recording
changes in net assets in each
country, as well as errors +
omissions
What are the causes of a current short term
account deficit?
too much AD (due to
consumer-led boom or
excessive government
spending)
overvalued exchange rate
SPICED
2.1.4 Balance of payments 2
, high inflation relative to main
trading partners
recession in main trading
partners
long term
low productivity
decline in quality/reliability of
exports
What is the relationship between balance of payments deficit is not
current account imbalances + other a problem as long as can be
macroeconomic objectives? funded (can be a sign that living
standards are rising)
becomes a problem when
reserves of foreign currencies
begin to run low → may lead to
currency falling in value →
inflationary
may be a sign that country is
becoming uncompetitive →
unemployment in domestic
economy
How can current account imbalance tax increase → reduce spending
be solved? on imports
cuts in government spending
(likely to cause slowdown in
economic growth)
How are economies interconnected international trade → countries
through international trade? interdependent → rely on each
other for income, resources +
goods/services
2.1.4 Balance of payments 3
, ∴ if one country or area suffers weak
demand → direct effect on other
countries
interconnectedness becomes a
problem when deficits/surpluses
on current account become
persistent (current account
imbalance)
countries have become net
exporters/importers due to
deindustrialisation of western
countries
What are causes of current
account imbalance?
country spending too much
not producing anything that
customers abroad want to
buy
stage of business cycle
strength of currency
loss of competitiveness in
manufacturing sector (most
significant UK factor)
costs of current account
imbalance only become
significant if the deficit/surplus is
unsustainable
What can persist deficit lead to?
value of currency falls →
uncompetitive
government may buy its
currency on foreign
2.1.4 Balance of payments 4
