Economics- Edexcel 4.1.7
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| what makes up the current account? | net balance of trade in goods, net balance of trade in services, net primary income, net secondary income
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| trade balance in goods | manufactured goods, component parts, raw materials, energy products, capital technology
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| trade balance in services | banking, insurance, consultancy, tourism, transport, logistics, shipping, education, health, research services, arts
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| net primary income from overseas assets | measures profits, interest and dividends from investments in other countries, includes net remittance flows from migrant workers living and working overseas
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| net primary income from overseas assets definition | mainly reflects the monetary flows generated from the owning of cross-border financial assets
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| net secondary income examples | overseas aid / debt relief transfers, military grants
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| net secondary income definition | the unrequited transfers of income from nonresidents to residents minus the unrequited transfers from residents to nonresidents
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| capital account main items | sale of patents, copyrights, franchises, leases and other transferable contracts/debt cancellation/capital transfers of ownership of fixed assets
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| capital account definition | records the net flow of investment transaction into an economy
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| financial account | transactions that result in a change of ownership of financial assets and liabilities
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| financial account includes | net balance of FDI, net balance of portfolio investment flows, balance of banking flows, changes to the value of reserves of gold and foreign currency held by a national government
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| FDI | investment from one country into another that involves establishing operations or acquiring tangible assets
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| FDI flows inwards | positive for UK financial account
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| FDI flows outwards | negative for UK financial account
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| portfolio investment flows | when people and businesses from one country buy shares or other securities such as government and corporate bonds in other nations
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| current account deficit | external deficit
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| deficit countries need to run what to achieve balance on their external accounts? | a financial account surplus
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| current account deficit countries | debtor countries
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| key causes of countries running large current account deficits | poor price and non-price competitiveness/strong exchange rates/recession/volatile global prices/strong domestic economic growth
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| structural causes of a current account deficit focussing on longer-term causes include | low labour productivity/insufficient investment limits nation export capacity/low levels national saving and high rates consumer spending/ long term declines in real prices of major exports
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| main consequences of a country running a large current account deficit | loss of AD weakens real GDP growth/causes external value of currency to depreciate leading to cost-push inflation & deterioration in ToT/if borrow increase external debt(risk if interest rates rise)/loss of investor consequence leading to capital flight
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| capital flight | a large-scale exodus of financial assets and capital from a nation due to events such as political or economic instability, currency devaluation or the imposition of capital controls
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| current account surplus | there is a net injection of income into a country’s circular flow
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| surplus nations | creditor countries
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| surplus leads to | an accumulation of foreign exchange including US dollars from rising export sales or an increase in net primary and secondary income flows
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| main causes of a current account surplus | surplus of savings over investment/positive gap between exports and imports/ high world prices for exports of commodities/strong net secondary and primary incomes/financial account deficit/stronger exchange rate
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| measures to reduce a country’s imbalance on the current account | expenditure switching policies, expenditure reducing policies
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| expenditure switching policies | policies designed to change the relative prices of exports and imports, e.g. exchange rate depreciation or import tariffs
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| expenditure reducing policies | policies designed to lower real incomes and AD and cuts spending on imports, e.g. higher direct taxes, cuts in government spending or an increase in interest rates
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| current account deficit corrected by changes in a country’s exchange rate | current account deficit leads to an outflow of currency causing an exchange rate depreciation(exports are more competitive), but depends on J Curve effect and Marshall-Lerner condition
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| J Curve effect | a currency depreciation may not improve the current account because of price inelastic for imports and exports in the short term, earnings from exports are less than higher spending on imports leading to a worsening balance of trade
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| why are price elasticities of demand for imports and exports likely to be inelastic? | contracts for imported goods are already signed and it takes time for export businesses to increase their export volumes following a fall in prices
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| Marshall-Lerner condition | providing that the sum of the coefficient of price elasticity of demand for imports and exports are greater than one, then the trade balance will improve over time
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| global trade imbalances | refer to persistent current account surpluses for some countries contrasted with deficits in other nations
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| trade deficit countries | run up large external debts/reliant on foreign capital/switch towards protectionist policies/fall in relative living standards if slows GDP
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| trade surplus countries | save more than spend, depressing global demand and growth/adopt policy to keep currency deliberately under-valued/may be under-consuming/allocate domestic scarce resources to exports not domestic consumer spending
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