Balance of payments

1. Balance of payments

2. The current account • Different from a personal current account and refers to trade in goods and services • Is in 4 parts; • trade in goods – (X – M) • trade in services (X – M) • investment income (X – M) • current transfers (X – M)

3. Calculating BOP

4. Calculating BOP

5. Imports • The purchase of goods and services by UK residents from abroad • Imports represent a debit on the balance of payments account • Imports may be purchased because: • They are better quality than those existing in the UK • They are not capable of being produced in the UK • The cost of production is lower than similar items produced in the UK • The service associated with such items may be better abroad than from UK producers

6. Exports • Exports are the sale of goods and services by UK residents to foreign buyers • Exports represent a credit on the balance of payments accounts • The level of exports may be dependent on the competitiveness of UK producers in comparison to those abroad

7. Imports and exports and money flows • Remember that each import and export involves money flows. An exporter to France will collect € then change this into £ when they bring the money back to the UK • An importer will collect £ and change into their local currency when taking it back

8. Trade • Trade not only occurs in goods and services but debits and credits are also recorded as a result of financial transactions, e.g. • Buying and selling of shares • Buying and selling of currencies • Buying and selling of bonds, financial derivatives, forward contracts, etc. • Movements of funds by governments and financial institutions – gold, Special Drawing Rights (SDRs), etc

9. Trade in goods Main categories of goods traded: • Food, beverages and tobacco • Oil • Basic materials • Coal, gas and electricity • Semi-manufactured goods • Finished manufactured goods

10. Competitiveness • UK trading position heavily reliant on the changing nature of competitiveness across the globe: • e.g the rise of countries like China and India – manufactured goods, call centres, etc. • Has an impact on UK trade – what we trade, how much we trade and who with

11. Competitiveness • Factors influencing international competitiveness important: • Level of domestic inflation in relation to our trading partners • Level of UK productivity in relation to trading partners • Level of investment in physical and human resources influences competitiveness • All affect the unit cost of production

12. Trade in services • The UK’s biggest services are banking, insurance and tourism (Heathrow) • Services are characteristic of a developed economy • Some economists say a thriving manufacturing sector is still needed!

13. Change in employment

14. Investment Income • Earnings from investments overseas minus income flowing abroad from foreign investments • Bank loans and buying/selling shares are examples • UK banks are big players in the international markets • Toyota and Nissan have invested in the UK – profits from these plants will be exported

15. Transfers • Measures transfers between countries; • Money sent to families abroad (both ways) • Government transfers; • Grants/aid to foreign countries • UK contributions to EU budget • Contributions to IMF, World Bank, WTO • Maintenance for troops, embassies and consulates abroad

16. Changes in the current account • Value of the currency (ER) • Changes in AD – increase tends to lead to more imports • Inflation – higher inflation than competitors will result in less exports • Labour productivity – lowers costs and makes goods more attractive for foreign buyers • Innovation – lead to new products and hopefully more exports

17. Current account and AD/AS model • P200 – copy 2 diagrams and make a note of the explanation!

18. Does it matter? • A country CAN have a deficit if there is inward flows to finance it • Can self correct if it is due to strong demand as the economic cycle will eventually reduce demand • Imports can be capital equipment which is used to make exports….

19. However….. • The deficit may indicate that the UK has lost competitiveness (low investment, productivity, comparative advantage) • Continued M > X will eventually lead to reduced levels of output and employment • Not easy to move from manufacturing to services from an employment POV

20. Which economy is performing the best?