Download Balance of Payments - econbus

The Balance of Payments
AS Economics
tutor2u™ & Mrs G
Syllabus aims:
 To understand that the current account comprises:
trade in goods, trade in services, investment
income and transfers.
 To understand the meaning of a deficit and a
surplus on current account.
 Note: a detailed knowledge of the structure of
the balance of payments account is not required.
What is the Balance of Payments?
• The balance of payments (BOP) records all
financial transactions between the UK and
the Rest of the World.
• The BOP figures tell us about how much is
being spent by British consumers and firms
on imported goods and services, and how
successful UK firms have been in exporting
to other countries and markets.
What is the Balance of Payments?
• The balance of payments accounts include:
– (a) Trade in goods
– (b) Trade in services
– (c) The net flow of investment income from UK
overseas assets
– (d) Transfers of money between people and
governments
• (a) to (d) comprises the Current Account
• This is all that is required for your AS
Economics course
UK’s Trade Balance 2009 latest figures!
Exam
technique….
China’s trade balance…
What does the
UK export?
UK Exports include
UK EXPORTS 2007
•Chemicals - £37.4bn
•Cars - £24.2bn
•Oil and gas - £22.7bn
•Food and drink - £10.6bn
•Underwear - £892m
•Wines - £209m
•Bicycles - £64m
UK Exports include
Taxi cars…
Foreign students….i.e.
Uni education
Trade in Goods
• Consumer durables
– Household goods (audio visual equipment,
furniture etc)
– Motor vehicles
– Personal computers, DVD recorder, cameras
• Capital goods / technology /software
• Commodities (including oil, gas and other fuels)
• Components & basic raw materials (plastics,
copper, tin, rubber, semi-conductors)
• Foodstuffs and Beverages
Trade Balance in goods
Components of the balance of trade in goods
UK Balance of Trade in Selected Goods
Annual trade balance, £ billions
10
Crude oil
Semi-manufactures
0
Food, beverages & tobacco
GBP (billions)
-10
-20
Exam
-30
technique….
-40
Finished manufactures
-50
80
82
84
86
88
Food, beverages and tobacco
Semi-manufactures
90
92
94
96
98
00
02
04
Finished manufactures
Crude oil
Source: Reuters EcoWin
Balance of trade in oil
Why is this
important to
the economy?
A familiar story!
Take a look at
your ‘neighbours’
shirt label – here
was it made?
Trade in Services
• Tourism and Travel including Civil Aviation
• Insurance and Business Consultancy Services
• Banking and Accountancy services
• Data processing and other information services
• Music & Entertainment
• Shipping
Trade in Services
• Recent Data
– United Kingdom was the world’s second largest
exporter of services in 2005
– The UK accounts for almost 8 per cent of global
exports and 6 per cent of the world’s imports,
making it also the fourth largest importer of services
– We run strong annual surpluses in trade in
services
– In 2005, the surplus on trade in services declined by
£2.7 billion to £18.7 billion
– This suggests that we have a comparative
advantage in many service industries
Trade in Services – Extra Detail
UK Balance of Trade in Services
Quarterly trade balance, seasonally adjusted
6
Exam
technique….
5
4
GBP (billions)
3
2 Financial services
1
Royalties and license fees
0
Communications
-1
Transportation
-2
-3
Travel
-4
-5
91
92
93
Travel
Communications
94
95
96
97
Financial
Transportation
98
99
00
01
02
03
04
05
06
Royalties and license fees
Source: Reuters EcoWin
Balance of Trade in Goods and Services
Exam
technique….
Balance of Payments – overall G & S
What impact does Balance of Trade have?
Whiteboard activity….
• 4 groups
• One to look at impact on households
• One to look at impact on businesses
• One to look at impact on govt
• One to look at impact on international standing
• What would be the impact of the UK exports falling (i.e.
further growth of BoP deficit)?
Whiteboard activity….
Households
Domestic Businesses
UK Govt
International
Economic Effects of a Fall in Exports
– Negative impact on aggregate demand
• C+I+G+(X-M)
• Fall in national output – multiplier effect on
incomes and spending
• Might trigger an economic slowdown /
recession
• Actual GDP will fall below potential GDP
(negative output gap)
Economic Effects of a Fall in Exports
– Negative effect on company profits and business
confidence
• Less demand implies less capital investment
• Can lead to plant closures / job losses /
cyclical unemployment
– Government finances will be affected
• Slower growth hits tax revenues + extra
welfare spending
– Some regions are more dependent on exports
than others (e.g. manufacturing industry)- might
worsen the “north-south divide”
Importance of Exports for UK
• Export earnings are an injection of AD
– A rise in exports boosts national income
– Multiplier effects should also be considered – a
rise in exports will lead to a bigger final increase
in national income which may then affect
investment demand
– Exports are important for UK manufacturing
industry (where exports are a high % of total
industrial production)
– Exports can help to ‘dampen’ or ‘cushion’ the
volatility of our economic cycle – e.g. if there is a
domestic economic slowdown / recession
Importance of Exports for UK
• Employment effects from exports
– Many thousands of jobs depend directly and
indirectly on the export sector
– Changes in export demand have effects in other
sectors further down the supply chain (e.g.
component suppliers for manufacturers and also
the distribution and marketing industries)
• Regional economy and exports
– Some regions are more dependent on exports
than others (e.g. the North east and Wales)
Your individual task….
Further reading
• http://www.statisti
cs.gov.uk/downlo
ads/theme_econ
omy/PB09.pdf
• For the latest
statistics
• http://www.statisti
cs.gov.uk/pdfdir/b
op1209.pdf
Balance of Payment Questions….
1.
What is meant by (2 marks each = 6 in total)
•
A trade gap?
•
A current account deficit?
•
A current account surplus?
2.
Explain why an economic boom may result in a current account
deficit. (3 marks)
3.
Explain why a recession may result in an improvement in the current
account position. (3 marks)
4.
To what extent might a current account deficit have an effect on
•
Employment?
•
Inflation?
•
Growth?
•
4 marks each = 12 marks
Total = 24 marks
Homework
Finish questions….