the balance of payme the balance of payments

 THE BALANCE OF PAYMENTS
STRUCTURE OF THE BALANCE OF PAYMENTS
CURRENT ACCOUNT
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Trade in goods and
services.
Investment Income
Income generated
by UK firms, from UK
investment in other
countries.
CAPITAL ACCOUNT
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FINANCIAL ACCOUNT
Transfers
Transfer of money
into and out of the
UK.
SR Capital Flows
Speculation, Hot Money – this is money
that regularly flows between financial
markets, looking for the highest short
term interest rates possible (e.g. George
Soros, Rogue Trader).
LR Capital Flows
FDI and assets (portfolio investment).
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SPECULATIVE FLOWS
When a trader makes bets and guesses about different
currencies - “hot money”.
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FOREIGN DIRECT INVESTMENT (FDI)
Direct investment from abroad – “inward investment”.
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BALANCE OF PAYMENTS
Difference between the amount of money coming in
and going out of the country.
The importance
of exports:
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DEMAND SIDE CAUSES
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Low interest rates à
encourages investment.
Discovery of oil.
Consumers/investors
expecting the exchange
rate to appreciate, and
for interest rates to fall.
UK is a highly open economy
Globalisation, commonwealth, general reputation, the EU, service exports.
Export earnings are an injection of AD
Exports help to stimulate economic growth. The UK is the 2nd largest service exporter
(behind the US).
Employment effects from exports
TRADE DEFICIT
Could affect suppliers and manufacturers.
Regional economy and exports
A trade deficit is a negative
Helps to reduce structural unemployment.
balance of payments in which
THE UK’S CURRENT ACCOUNT RECORD
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CAUSES OF HOT MONEY
a country imports more than it
exports.
SUPPLY SIDE CAUSES
Strong GDP Growth.
Greater demand à firms earn more money
à a need to import more to produce
output.
Increase in UK income, and greater
availability of credit.
A higher disposable income à more
imports.
Strong Pound.
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Low productivity.
Less competitive – research and
development gap.
High productivity in other countries.
E.g. China.
Insufficient capacity from British
producers.
TRADE DEFICIT IS A PROBLEM FOR ECONOMY
TRADE DEFICIT IS NOT A PROBLEM FOR ECONOMY
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It can put serious pressure on a
country’s currency.
The recession in Britain in the early
1990s was largely due to huge
deficits built up in the 1980s.
There has been excess consumption
- growth will have to slow down to
bring the deficit down.
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The UK usually ends up relying on foreign
direct investment or borrowing to make
up the difference – it doesn’t matter in a
globalised economy.
The UK economy has survived the last 11
years without a recession.
CONCLUSION: Although the UK economy has been fairly stable over the last 11 years,
there is a risk that an ever-increasing budget deficit will put too much pressure on the
pound, whilst driving economic growth down (multiplier effect).
GOVERNMENT POLICY
DEMAND SIDE POLICIES
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SUPPLY SIDE POLICIES
Money Supply
Reduce the money supply à Less
consumption à less A.D à fewer imports à
more balanced balance of payments.
Interest Rates
Increase interest rates à consumers have a
lower disposable income à less
consumption à less AD à fewer imports.
Taxation
Increase the income tax rates (or brackets)
à consumers have a lower disposable
income à less consumption à less AD à
fewer imports.
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Government Subsidies
E.g. to improve UK
competitiveness à more imports.
Improve the skill set of workforce
E.g. by attracting immigration.
NULabour have increased
spending on education (e.g.
“The New Deal”).
SR: Use demand side policies.
LR: Use supply side policies.
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Issue of time?
Dramatic effects on the economy?