IGCSE Economics The Balance of Payments

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Presentation transcript:

IGCSE Economics The Balance of Payments

What is the balance of payments? The balance of payments records of all international financial transactions BoP accounts includes: Trade in Goods Trade in Services Net Flow of Investment Income from Overseas Assets Transfers of Money between people and governments Capital Flows Direct investment (factories, mergers and acquisitions) Financial Investment – savings in stocks & bonds Currency trading

Balance of Payments Accounts – This part is very important! To calculate + Trade balance in goods (visibles + / - ) + Trade balance in services (invisibles + / - ) + Net investment income ( + / - ) + Transfers ( + / - ) = Current Account balance - You need to know this + Capital Account Flows (From savings and borrowing + / - ) = Balance of Payments – You need to know this

Trade in Goods - make sure you can give examples! Consumer durables Household goods (audio visual, furniture etc) Motor vehicles Capital goods / technology /software Commodities (including oil and other fuels) Components & basic raw materials Foodstuffs and Beverages Semi-finished manufactured products

Explaining an actual deficit (UK or USA) in the Trade in Goods Demand Side Explanations (Cyclical) Rising economic growth – increased demand for inputs as we get richer - can’t produce all that we consume so we rely in imports to plug the gap. Strong growth of real consumer spending (as we get richer!) Effect of the strong exchange rate – leading to a slower growth of export (+ expensive) and fast growth of imports (cheaper) Supply Side Explanations (structural) - Extension only! Insufficient productive capacity from suppliers - Linked to relatively low rate of capital investment in the longer term. Can’t meet domestic demand. Inadequate non-price competitiveness in many markets. Goods are lower quality and less attractive e.g. cars. A research and development gap in key industries – UK has smaller share of global patents than other comparable countries Changing comparative advantage in the global economy - emergence of new lower-cost competition (Asia and NIC’s)

Trade in Services (Tertiary and quaternary) Tourism Travel / Civil Aviation Insurance Consultancy Banking and Accountancy services Data processing Information services Music & Entertainment Shipping

A Structural Surplus for Services (in the UK – HK as well?) Britain enjoys a comparative advantage in many service industries Highly developed financial system (City of London) Significant capital accumulation (including inward investment from overseas financial organisations. The UK is a good place to invest and made so by the Govt) Skilled labour force Not all services in the UK enjoy a surplus Tourism and Travel has a deficit Transport and communication Surplus in services is not sufficient to offset the trade deficit in goods

The UK earns income from our external assets overseas Net Investment Income Investment income comes from interest, profits and dividends from foreign assets owned by UK residents and companies The UK earns income from our external assets overseas Net flow for the UK is positive Reflect high level of investment overseas = Difference between GDP (generated domestically) and GNP (total) Net investment income values are quite volatile – difficult to predict from year to year. Nobody could predict SARS, 9 /11, IRAQ war .. Fluctuations in global stock markets Fluctuations in exchange rates Changes in the world economic cycle

Net Overseas Transfers Transfers across countries Government payments to the European Union Government spending on embassies & armed forces commitments Private transfers between households Transfers account is negative for the UK Largely the result of UK being a net contributor to the European Union. UK pays a huge amount to the EU! UK is one of the richer nations within EU15 and therefore is a net contributor to the EU budget

Current account balance = The Current Account Current account balance = Balance of trade in goods + Balance of trade in services + Net Investment Income from External Assets + Transfers If inflows are greater than outflows, the UK is running a current account surplus. If outflows exceed inflows – the UK is running a deficit Current account balance can be measured in $$$$s or as a share of national income (% of GDP)