BoP!

Syllabus aims Understand the different components of the Balance of Payments. For example: the trade in goods and services current account …as well as the accounts showing short- and long-term capital flows.

What is the Balance of Payments? The balance of payments (BOP) records all financial transactions between the UK and the Rest of the World. The BOP figures tell us about how much is being spent by British consumers and firms on imported goods and services, and how successful UK firms have been in exporting to other countries and markets.

Application Exam techniques!

Application Exam techniques!

‘Balance’ of payments.

There are two main parts to the balance of payments accounts The current account which measures the net balances in The capital account measures the net flows of different forms of capital between nations

The current account The current account which measures the net balances in Trade in goods Trade in services Investment income from overseas assets Transfers (private and government) between countries

The capital account The capital account measures the net flows of different forms of capital between nations Direct capital investment including foreign direct investment E.g. Inflows of capital spending by foreign firms Takeovers of domestic businesses by foreign-owned businesses / investors Financial investment flows Inflows of money from overseas into government bonds, property Banking flows E.g. Inflows of “hot money” into a country’s banking system seeking the highest rate of return

How does it balance? Basic assumption is that – if a country is running a current account deficit, this is “balanced up” or “financed” by seeking to run a capital account deficit

So how can the UK afford a large BoP deficit? Intro to A2 BoP So how can the UK afford a large BoP deficit? A country needs to attract sufficient capital inflows to balance the books up. For the UK, this had happened by… Relatively high interest rates and a fairly strong currency – makes the UK an attractive home for hot money (not any more!) Strong performance of the UK property market (until recently!) Several hi-profile foreign takeovers of UK businesses e.g. Tata Steel buying Corus in 2007 and Tata’s takeover of Land Rover and Jaguar in 2008, Kraft purchase of Cadburys, L’oreal of Body Shop. UK had been a favoured venue for inward investment If insufficient capital flows come in to offset a current account deficit, then under IMF rules, a country must make an adjustment to the size of their stock of gold and foreign currencies e.g. a deficit country might reduce their official reserves. Mrs Gordon's Notes

Current account surplus.

Current account surplus… If a country is running a large current account surplus (e.g. China, or the OPEC oil producers) This gives them the scope to run capital account deficits (i.e. they can use some of their mountain of foreign exchange reserves to invest overseas. (think China bailing out US!) The rapid development of sovereign wealth funds is testimony to big global trade imbalances. ;)

Short term v long term capital flows

Short term flows Short term capital flows give a country more LIQUIDITY This means that it is easier for the owner of the investment to get their investment back in full

Long term flows Short term capital flows creates more ILIQUIDITY This means that it is harder for the owner of the investment to get their investment back in full. There will probably be a depreciation in the return. Long term capital investments are RISKY!

International Capital Flows Gordon Brown speaks out against de-globalisation of capital flows. Essential to maintain the flow of capital markets…

News articles http://news.bbc.co.uk/1/hi/business/8059079.stm China doubles gold reserves http://www.bbc.co.uk/worldservice/learningenglish/language/wordsinthenews/2009/04/090501_witn_china_gold.shtml

World economies rebound but China set for best growth http://news.bbc.co.uk/1/hi/business/8367983.stm

Textbook p480 -482 for more theory Extra reading Textbook p480 -482 for more theory

Homework Continue with article research on protectionism – quota, tariff, embargo Start to revise – you will be having a TEST next Thurs… On WTO Specialisation (won’t do numerical work on absolute/comparative advantage yet) Free trade Protectionism Tariff / Quotas