CHAPTER 35: BALANCE OF PAYMENTS ON

THE CURRENT ACCOUNT

Types of trade Getting started P160

i. Visible trade = international trade in goods → balance of trade or visible balance = visible exports (X) – visible imports (M)

e.g. Fig 35.3

ii. Invisible trade = international trade in services

* Do Q1

Balance of Payments = a record of all transactions relating to international trade; Made up of;

1. Current account = shows value of all M & X (visible & invisible) + net income (profits, dividends, interest)

http://www.youtube.com/watch?v=Pbj9auFz9Ck&feature=related

(BoP The current Account 5:06)

http://en.wikipedia.org/wiki/List_of_sovereign_states_by_current_account_balance

2. Capital Account = flows of money from investments

If all exports >imports →current account surplus If all imports > exports →current account deficit

What are the effects of a current account surplus/ deficit?

Brainstorm

Deficit Surplus

↑ borrowing (external debt) ↓ foreign currency reserves

↑ overseas lending ↑foreign currency reserves

↑ unemployment → ↓ EG as consumers buy imports and export demand is low

↓ unemployment → ↑ EG as export demand is high and import demand is low

Exchange rate falls as demand for currency is low and supply is high

Exchange rate strengthens as demand for currency is high and supply is low

BoP & the government One of government’s macroeconomic objectives

is to ensure over a period of time the balance on the current account is roughly equal

Is the UK’s current account deficit of around 66 billion $US large?

Not really as a percentage of their GDP of around 2.43 trillion $US. That’s only around 2.7%

Exam practice Update glossaries for Macroeconomics section Find out current account data for your country