a2 macroeconomics - revision on the balance of payments
TRANSCRIPT
The Balance of Payments
EdExcel A2 Macro – June 2016
• Examination length: 2 hours• One essay question with two parts from a choice of
three topic areas. Worth 50 marks.• One data response question out of a choice of two
questions. Worth 50 marks.
The Balance of PaymentsWhy is World Trade Growing Slowly at the Moment?WTO Report (2015) Annual Growth of World TradeThe A2 Macro Exam (Unit 4) June 2016
• Understand the different components of the Balance of Payments• Understand the factors influencing the size of deficits and
surpluses on different components of the Balance of Payments• Understand the significance of deficits and surpluses on
the current account• Evaluate measures to correct trade imbalances
The Balance of PaymentsWhy is World Trade Growing Slowly at the Moment?WTO Report (2015) Annual Growth of World TradeA2 Syllabus for the Balance of Payments
The Balance of Payments
• The balance of payments (BOP) records all financial transactions made between consumers, businesses and the government in one country with other nations
• Inflows of foreign currency are counted as a positive entry (e.g. exports sold overseas)
• Outflows of foreign currency are counted as a negative entry (e.g. imported goods and services)
• The current account of the balance of payments is the main measure of external trade performance
• The financial account measures inflows and outflows of financial capital across national boundaries
Why is World Trade Growing Slowly at the Moment?WTO Report (2015) Annual Growth of World TradeKey Intro for Balance of Payments (BoP)
• Current Account• (1) Balance of trade in goods• (2) Balance of trade in services• (3) Net primary income (interest, profits, dividends and migrant remittances)• (4) Net secondary income (contributions to EU, military aid, overseas aid)
• Capital account• Sale/transfer of patents, copyrights, franchises, leases and other transferable
contracts, and goodwill• Transfers of ownership of fixed assets
• Financial Account – includes transactions that result in a change of ownership of financial assets and liabilities between UK residents and non-residents• Net balance of foreign direct investment flows (FDI)• Net balance of portfolio flows (e.g. inflows and outflows of debt and equity)• Balance of banking flows (e.g. hot money flowing in/out of banking system(
• Balancing item (estimated errors & omissions)
• Changes to the value of reserves of gold and foreign currency• Overall balance of payments = zero
The Balance of PaymentsWhy is World Trade Growing Slowly at the Moment?WTO Report (2015) Annual Growth of World TradeThe Balance of Payments Account
The Major Export (Goods) for each country in the World in 2014
Current account surplus countries (Measured as a % of GDP, Source IMF)
Country 2013 2014 2015Singapore 17.9 19.1 20.8Taiwan Province of China 10.8 12.4 12.4Netherlands 10.8 10.2 9.6Kuwait 41.2 31.0 9.3Germany 6.4 7.4 8.5Switzerland 11.1 7.3 7.2Korea 6.2 6.3 7.1Denmark 7.2 6.3 7.0Norway 10.0 9.4 7.0Sweden 6.7 6.2 6.7Slovenia 5.6 7.0 6.7Thailand -0.9 3.3 6.2Qatar 30.9 26.1 5.0Ireland 3.1 3.6 3.2China 1.6 2.1 3.1Azerbaijan 16.4 14.1 3.0Japan 0.8 0.5 3.0
Causes of current account surpluses
Stru
ctur
alSurplus of savings over
investment
Significant long run competitive advantage
Long run rise in global prices of main exports
Structural increase in net investment income
Trend rise in factor productivity
Cycl
ical
Depreciation of the exchange rate
Strong consumer demand in export
markets
Cyclical improvement in terms of trade
Fall in costs of essential imports
Rise in net inflows of remittances / profits
Causes of current account surpluses
Stru
ctur
alSurplus of savings over
investment
Significant long run competitive advantage
Long run rise in global prices of main exports
Structural increase in net investment income
Trend rise in factor productivity
Cycl
ical
Depreciation of the exchange rate
Strong consumer demand in export
markets
Cyclical improvement in terms of trade
Fall in costs of essential imports
Rise in net inflows of remittances / profits
R&D Spending and Scientists per Million People – By Country (2013)
Economic Policies to Reduce a Trade DeficitWhy is World Trade Growing Slowly at the Moment?WTO Report (2015) Annual Growth of World TradeSignificance of Current Account Surpluses
Contributor to GDP i.e. net external demand is positive
Might cause demand-pull inflationary pressure
Accumulation of foreign exchange reserves
Pressure on the currency to appreciate
Allows a country to be a net exporter of capital
Huge surpluses could trigger protectionist responses
Economic Policies to Reduce a Trade DeficitWhy is World Trade Growing Slowly at the Moment?WTO Report (2015) Annual Growth of World TradeSignificance of Current Account Surpluses
2006 2007 2008 2009 2010 2011 2012 2013 20140
500
1000
1500
2000
2500
3000
3500
4000
4500
1,066.3
1,528.2
1,946
2,399.2
2,847.3
3,181.13,311.6
3,821.3 3,843
Fore
ign
exch
ange
rese
rves
in b
illio
n U.
S. d
olla
rs
China’s persistent current account surpluses built around their export-led economy has been a key factor allowing the country to build up huge reserves of gold and foreign currency – this is shown in the chart
Economic Policies to Reduce a Trade DeficitWhy is World Trade Growing Slowly at the Moment?WTO Report (2015) Annual Growth of World TradeSignificance of Current Account Surpluses
Yuan appreciating against the US dollar
Yuan devaluation in summer of 2015
Current account deficit countries (Measured as a % of GDP, Source IMF)
Country 2013 2014 2015
Libya 13.6 -30.1 -62.2
Liberia -28.2 -28.7 -41.6
Mozambique -40.0 -34.7 -41.0
Djibouti -23.3 -25.6 -31.4
Zimbabwe -25.4 -22.0 -22.9
Lebanon -26.7 -24.9 -21.0
Niger -15.3 -15.2 -19.1
Kyrgyz Republic -15.0 -16.8 -17.7
Algeria 0.4 -4.5 -17.7
Montenegro -14.6 -15.4 -17.0
Oman 6.6 2.0 -16.9
Causes of current account deficits
Stru
ctur
alUnder-investment
Relatively low productivity
Persistently high relative inflation
Inadequate R&D, innovation
Emergence of lower cost competition
Cycl
ical
Over-valued exchange rate
Boom in domestic demand
Recession in key export markets
Slump in global prices of exports
Increased demand for imported technology
Causes of current account deficits
Stru
ctur
alUnder-investment
Relatively low productivity
Persistently high relative inflation
Inadequate R&D, innovation
Emergence of lower cost competition
Cycl
ical
Over-valued exchange rate
Boom in domestic demand
Recession in key export markets
Slump in global prices of exports
Increased demand for imported technology
Economic Policies to Reduce a Trade DeficitWhy is World Trade Growing Slowly at the Moment?WTO Report (2015) Annual Growth of World TradeSignificance of Current Account Deficits
Net outflow of AD from circular flow – this is a drag on real GDP growth
Loss of jobs in export sectors & industries affected by rising imports – negative multiplier effects e.g. consider steel, coal etc.
Fall in foreign exchange reserves - can be problematic for smaller developing nations who struggle to attract financial capital
Can lead to exchange rate weakness - reducing real living standards and increasing investor risk – higher yields on government debt
Can a deficit be financed by hot money and portfolio investments?
Economic Policies to Reduce a Trade DeficitWhy is World Trade Growing Slowly at the Moment?WTO Report (2015) Annual Growth of World TradeMeasures to Correct a Current AC Deficit
Deflationary monetary policy
Deflationary fiscal policy
Internal devaluation
Expenditure reduction
Depreciation of the currency
Import barriers
Supply-side improvements
Expenditure switching
Economic Policies to Reduce a Trade DeficitWhy is World Trade Growing Slowly at the Moment?WTO Report (2015) Annual Growth of World TradeMeasures to Correct a Current AC Deficit
Deflationary monetary policy
Deflationary fiscal policy
Internal devaluation
Expenditure reduction
Depreciation of the currency
Import barriers
Supply-side improvements
Expenditure switching
Economic Policies to Reduce a Trade DeficitWhy is World Trade Growing Slowly at the Moment?WTO Report (2015) Annual Growth of World TradeMeasures to Correct a Current AC Deficit
Cyclical causes of a deficit tend to be partly self-correcting
Floating exchange rate can help to reduce deficits but this depends on Ped and Pes of export industries and Ped for imports
Protectionist measures are limited by existing WTO and EU commitments / policies – bring in game theory aspects here
Supply-side is crucial to restoring competitiveness in the long run
Measures to correct deficit may harm other objectives in short run
Annual UK Trade Balance in Goods and ServicesSource: Office for National Statistics
19851987
19891991
19931995
19971999
20012003
20052007
20092011
20132015
-50000
-40000
-30000
-20000
-10000
0
10000
Trade in Goods & Services: Total balance: £million
UK Trade and Current Account Balance (% of GDP)
2009Q1
2009Q3
2010Q1
2010Q3
2011Q1
2011Q3
2012Q1
2012Q3
2013Q1
2013Q3
2014Q1
2014Q3
2015Q1
2015Q3-7.0
-6.0
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
Trade balance (%, GDP)Current account balance _x000d_(% GDP) In 2015, the UK’s
current account deficit was £96.2 billion, up from a deficit of £92.5 billion in 2014.
The deficit in 2015 equated to 5.2% of GDP at current market prices.
This was the largest annual deficit as a percentage of GDP at current market prices since annual records began in 1948
Economic Policies to Reduce a Trade DeficitWhy is World Trade Growing Slowly at the Moment?WTO Report (2015) Annual Growth of World TradeA2 – Key Focus Points
Global trade imbalances are getting bigger – a threat to globalisation
Focus on the individual context of each country (developed/developing)
Distinguish between cyclical and structural causes
This helps to inform the appropriate policy response
Key question for deficit countries - is it sustainable in the long run?
Volatile profit streams of TNCs having a major effect on the UK current account
The Balance of Payments
EdExcel A2 Macro – June 2016