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Balance Of Payments Notes

Economics Notes > Macroeconomics Notes

This is an extract of our Balance Of Payments document, which we sell as part of our Macroeconomics Notes collection written by the top tier of Wallington High School For Girls students.

The following is a more accessble plain text extract of the PDF sample above, taken from our Macroeconomics Notes. Due to the challenges of extracting text from PDFs, it will have odd formatting:

MEASURE OF ECONOMIC PERFORMANCE iv.) THE BALANCE OF PAYMENTS
- UK's B of P continues to drop A set of accounts that record economic transactions between the UK and the rest of the world (R.O.W) in a given time period. Includes a series of sub totals/ balances between inward and outward transactions. It produces an overall net flow of transactions and shows how the flow is funded. (Source ONS Website) Possible Confusion:
- The balance of payments deficits/ surpluses are often confused with the government budget deficits/ surpluses.
- The balance of payments involves all sectors of the UK economy - households, firms and government.
- The government budget is primarily the concern of government.

*The balance of payments must ALWAYS balance!
CURRENT ACCOUNT Records net values of:

* Exports + Imports

* Income earned on overseas assets

* International Transfers of Funds by individuals & governments

CAPITAL & FINANICAL ACCOUNTS Records:

* Capital Transfers

* Activities of MNCs

* Funds put in/ taken out of National Stock and Money Markets

Calculation:

*

*

Based on data from HM Revenue and Customs for trade in goods and ONS surveys for trade in surveys. Data published monthly, quarterly and annually.

Causes: Possible Causes of Deficit on the UK's current account of the B.O.P:

*

Short - term factors include:

1. Increase in National Income (Y) - sustained growth in household and business spending which the domestic economy cannot fully satisfy (high Marginal Propensity to Import [*mpm
= measure of an economy's tendency to buy foreign goods]).
- Associated with boom stage of the UK business cycle.

2. A decrease in incomes abroad associated with recession/ slump of the global business cycle.

3. A higher UK inflation rate than competitor nations.

4. A strengthening of Sterling's exchange rate.

*

Longer - term factors include:

1. A UK productivity gap in tradable sectors - measure of efficiency not output

2. A lack of competitiveness based on non - price factors

3. Insufficient Research & Development (R&D) - from retained profits

*

Long - term factors include:

1. Changing structure of the UK and global economy (see comparative advantage)

Consequences: REMEMBER to put the deficit or surplus into context:

* Size of deficit - compared to GDP, is it significant?

* Causes - how easily can it be addressed?

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