Download Aggregate Demand

OF
Who
Is
This
Balance of Payments
How economies are connected
• Globalisation means economies are very connected
– Check your clothes label; where do they come from? Your iPad, iPhone?
• Goods are produced all around the world and sold all around the
world
– Some components for the iPhone may come from Japan, be assembled in
China and sold in Kingston
– When you need support when your iPhone stops working, you may speak
to someone in India
– Parts of Airbus planes are produced all over Europe, and sold anywhere in
the world
• Firms and investors own assets (physical and monetary, eg shares)
all around the world
• Individuals may work in many countries. For example, there is free
movements of labour within Europe
• Governments measure this interconnectedness with the balance of
payments
What is the balance of payments
• The balance of payments is a record of all economic
transactions between the residents of a country and the rest
of the world
• There are two main parts to the balance of payments
Current account – the trade in goods
and services account, plus the primary
income account and secondary income
account
Financial account and capital
account – refers principally to net
purchases of financial and other assets.
Look at next year
• Overall, the balance of payments must, er, balance
– This means all the deficits in any of the accounts will be balanced by
surpluses in others
• In Theme 2 we are only interested in the current account, in
particular in the trade in goods and the trade in services.
Current Account
• Net trade in goods (sometimes called visibles)
– exports of goods minus imports of goods
• Net trade in services (sometimes called invisibles)
– exports of services minus imports of services
• Primary income flows
– From the net lending of factors of production overseas
• Earnings being transferred to a workers home country
• Net interest, profits and dividends from overseas assets
• Secondary income flows
– When the payment is not as a result of an economic transaction,
so transfers
• Mostly government transfers, such as our payments to the EU
The UK’s current account
£ billion
Trade in goods and services
Trade in goods
Trade in services
Total trade
Primary income
Compensation of employees
Investment income
Other primary income
Total primary income
Secondary income
General government
Other sectors
Total secondary income
Current balance (current account)
2013
2014
-115.2
81.0
-34.2
-123.7
89.1
-34.5
-0.3
-16.0
-0.5
-16.8
-0.4
-32.0
-0.7
-33.1
-22.7
-4.1
-26.8
-20.9
-4.3
-25.2
-77.9
-92.9
The current account deficit in 2014 was equivalent to 5.2% of GDP – too big
What do we export and import?
And services?
£ billion, 2014
Exports
Imports
Trade balance
Food, beverages and tobacco
19.1
38.5
-19.4
Basic materials
7.0
11.8
-4.8
Total oil
32.7
43.0
-10.4
Total semi-manufactured goods
76.9
96.5
-19.6
Total manufactured goods
147.5
210.8
-63.3
Transportation
26.6
18.7
7.3
Travel
28.3
38.4
-10.1
Financial services including insurance
69.3
11.4
58.0
Royalties and fees
10.9
5.9
5.0
Other business
57.1
35.5
21.6
Total
219.8
130.6
89.1
Services
Other business includes law, management consulting, engineering, research and
development, advertising etc.
Exports and Imports as % GDP (2010)
Imports
Exports
176.7
100
90
80
70
60
50
40
30
20
10
0
141.5
Task
• In small groups consider the effect on exports or imports
on the factors listed below. Take 2 minutes to discuss
and then feed back to the rest of the class
• The questions you have been asked to consider are:
– What happens to UK exports if the pound falls in value against
other currencies
– What happens to imports if the pound falls in value against
other currencies
– What happens to imports if the government cuts income taxes
– What happens to exports if Europe goes into recession
– What happens to exports and imports if there is an increase in
labour productivity in the UK
Factors affecting exports and imports
– What happens to UK exports if the pound falls in value against
other currencies
• UK goods would become cheaper in overseas markets. Demand will
rise, and so exports would rise – improving the current account
– What happens to imports if the pound falls in value against
other currencies
• Imported products will be more expensive, so demand will fall and so
(the volume of) imports will fall
– What happens to imports if the government cuts income taxes
• Disposable income rises so consumers spend more so demand will
rise. Some of the increase in spending will be on imports, so imports
will rise, worsening the current account
Factors affecting exports and imports
• What happens to exports if Europe goes into
recession
– Well European economies are already weak. A further
weakening would lower demand in Europe, meaning lower
demand for UK exports, worsening the current account
• What happens to exports and imports if there is an
increase in labour productivity in the UK
• This means UK goods and services are cheaper to produce, which
should mean an increase in exports, and a switch to UK goods
rather than imports
• Note if other countries improve their competitiveness, then the
reverse happens
Current Account Deficit
• So why does the UK have a current account deficit?
– Our export markets are weak because the world economy
is weak?
– Imports are growing because the UK economy is
recovering
– The pound has been too strong, and so exports are weak?
• Perhaps, though some may think the Pound has been a bit weak
– We have lost competitiveness – other countries have
improved productivity faster than us, particularly in
manufacturing
• Clearly this has happened to come extent. However, we are
clearly very competitive in services
Do countries need a Current Account
Surplus?
• Adding together all the current account balances of all
countries, the answer must be:
– Zero. One country’s exports are another country’s imports
• So is it OK for a country to run a permanent current
account deficit or surplus?
– Not in the long run, particularly if the deficit/surplus is too large
relative to the economy. Why?
– A deficit means a country is spending more than it is producing.
This must be financed by borrowing, or selling assets. Cannot be
done forever!
• Generally governments will aim for near balance on
current account in the long run. Small deficits or
surpluses are acceptable