The Balance of Payments

Define Balance of payments.

A record of our transactions with the rest of the world.

How can the government correct a current account deficit in the short-term?

1. Encouraging more FDI in the form of building factories, and into UK property. 2. Increasing interest rates to encourage hot money flows. 3. Sell government bonds to overseas investors. 4. Imposing tariffs and import quotas to reduce the amount of foreign imports.

What are the 2 main sections of the current account?

1. Trade in visible goods. 2. Trade in invisible services.

How can the government correct a balance of payments deficit in the long-run?

1.By reducing demand in the economy for all goods - including imports. 2. Improve international competitiveness. (reduce wage costs, weaken the pound, improve productivity, widen skill base of workforce, reduce import penetration etc.)

How do you get the balance on the current account?

By adding together the balance of trade in goods and the balance of trade in services.

Why is investment in fixed assets and property much more stable.

Factories cannot sprout legs and leave.

What is a balance of payments surplus?

If we export more than we import then we are said to have a balance of payments surplus. (More money has flowed into the country to pay for UK exports than has flowed out of the country to pay for foreign imports).

What is a balance of payments deficit?

If we import more than we export then we are said to have a balance of payments deficit. (More money has flowed out of the country to pay for foreign imports than has flowed into the country to pay for UK exports).

How could reducing the strength of the pound improve the balance of payments position?

It makes imported products more expensive and exported goods cheaper.

Why is selling UK assets to foreigners not really desirable in the long-run?

Nothing physical leaves the country, but money flows in. The UK economy is left vulnerable to capital flight.