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The Balance of Payments A2

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Information on the Balance of Payments for A2, building on that of ECON2

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The Balance of Payments A2

  1. 1. Aquinas College Economics DepartmentThe Balance of PaymentsFinancial Transactions betweenBritain and the WorldECON4
  2. 2. Aquinas College Economics DepartmentDefinitionYou need to know about the Current Account Capital Account Financial AccountA record of the financial transactions between countriesand trading partners
  3. 3. Aquinas College Economics DepartmentCurrent AccountIt contains the countries net income from tradeIf the total imports exceeds the total exportsthen the country is running a current accountdeficit on the balance of paymentsThe part of the balance of payments that records trade ingoods e.g. Tangible products and services e.g. Financialservices
  4. 4. Aquinas College Economics DepartmentTrade in GoodsVisible Goods e.g. Tangible goodsFocused on imports – exportsUK consistently runs a deficit here due to thedecline in UK manufacturing – (possible impactof globalisation?)
  5. 5. Aquinas College Economics DepartmentTrade in ServicesInvisible GoodsFinancial Services tend to fall under hereThe UK runs a surplus here due to the largeservice sector in the UK Economy.The City of London is a good example of thiswith large financial institutions
  6. 6. Aquinas College Economics DepartmentNet Income FlowsInterestProfitsDividendsAll of these will come from UK Assets in othercountries e.g. RBS Branches in MalaysiaEqually foreign countries will take out of the UKeconomy like EDF Energy profits go back toFrance
  7. 7. Aquinas College Economics DepartmentCurrent TransfersMainly government transfers to internationalorganisations European Union International Monetary Fund United Nations World Bank World Trade Organisation NATO
  8. 8. Aquinas College Economics DepartmentThe Capital AccountA small part of the total Balance of PaymentsIncludes Repatriation of Financial Capital Government Transfers Up keep of UK Diplomatic Missions Some Foreign Aid
  9. 9. Aquinas College Economics DepartmentThe Financial AccountRecords the movement of financial capital intoand out of the UK. Three main components Net Foreign Direct InvestmentOutward FDI: UK companies investing in othernationsInward FDI: Foreign companies investing in the UK Net Portfolio Investment Other Capital Inflows – ‘hot money’
  10. 10. Aquinas College Economics DepartmentShort Term / Long TermShort run capital flows are normally classed asone year long. Arises normally from speculatorsthrough financial institutionsLong term capital flows tend to be moreportfolio investments such as shares or otherfinancial assets.
  11. 11. Aquinas College Economics DepartmentAdvantages and DisadvantagesAdvantages DisadvantagesPromotes global economic growth Problems in one countries financial systemcan impact on that of another e.g. SubPrime Mortgage CrisisGenerates more sources of finance FDI can lead to global dominance by a fewfirmsFDI can bring about important Supply SidereformsHot Money flows can destabilise acurrencies value if done in large enoughamountsOf International Capital Flows
  12. 12. Aquinas College Economics DepartmentAS Level Revision Site (ECON1, ECON2)• http://www.aquinaseconomicsas.co.ukA2 Level Revision Site (ECON3, ECON4)• http://www.aquinaseconomicsa2.co.ukAquinas Economics on Twitter• http://www.twitter.com/aquinaseconomicUseful Links

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