Describe the structure of the balance of payments on current account in a country and discuss how and why a government might influence the current account of a country.
There is no word limit on this...you all know you need to write a lot! This is a big question which has many parts to it, so please make sure you have answered ALL of the question.
There are some notes here to help you.
Due in on Wednesday the 14th of November
Good luck.
Mr Wickham
The balance of payments is a financial sistem that sets at the monetary transactions between a country and the rest of the world in a particular period of time.
ReplyDeleteThe balance of payments has 3 main types which are the capital account, the financial account abd the current account. The current account is known to be the most important. This measures payments for visible and invisible imports, exports and net income flows and transfers. It also has four main elements inside it; trade in goods which is visible, trade in services, inisible and finally income flows and curent transfers.
An export is a good or service sold to another country in return for payments. It leads to inflows of money into the economy. Also, an import is a good or service brought form another country. it leads to outflows of money from the economy.
Generalising, trade goods, or physical products are called visible items (imports or exports) and trade services are called invisible items (exports or imports)
So current output has visible and invisible items but there are more things included in the calculation. To start off with, we have income flows, that include wages earned by residents working overseas or wages paid to foreign workers and only international payments of interest, profits or dividends. Finally, there are current transfers, which are payments or debits that go abroad such as taxes and excise payable to the European Union and contributions to the EU budget. Also, payments are received ,credts such as EU subsidies.
If the value of expots is greater than the value of imports there is said to be a current account surplus.
Many countries run deficits in their current accounts. A deficit in the current acount of balance of payments is not necessarily a problem as long as the countrie is able to attract inflows of capital from countries with surplus, and a country has a large economy. It can however cause problems for samaller economies in the long term.
In the longer term, governments will always try and make the account balance, in other words, if you have a few years of deficits (beacuse your exports where not competitive enough), the government will want to turn this into surpluses in succeeding years to pay off the deficits.
However the government can take actions so that the economy is internationally competitive. Trade barriers is one thing, to restrict certain imported goods. Protect the domestic producers by taxes on imported goods and services. Subsidise domestic industries to give them a competitive advantage. Encourage consumers to by domestically produced products. Contractionary fisical policy, by raising taxes and cutting spending, the governmenet can reduce total demand for imports comparred to exports. Raise interest rates can attract an inflow of savings frpm abroad as well as using domestic borrowing by consumers which they might otherwise spend on imports. Allow interest rates to depriciate; a large deficit will cause the exchange rate of the currency to fall, so incims will therefore become more expensive but exports cheeper and as the demand for imports will fall , the demand for exports will rise, the trade deficit will disapear.
The balance of payments is a financial system that sets out monetary transactions between a country and the rest of the world. There are three main parts of the balance of payments which are current account , capital account and financial account.
ReplyDeleteThe Capital account measures payments involving the sale of capital goods or fixed assets such as buildings and machinery. The Financial account measures the flow of loans, payments, loan repayments and the sale of shares. The Current account measures payments for visible (physical goods) and invisible (services) imports and exports and net income flows and transfers. Imports are goods or services bought from abroad. Exports are goods and services that are sold abroad.
Income flows measures wages earned by residents and wages paid to foreign workers and international payments. Current transfers are payments received and paid to the EU.
A country can enter a deficit and a surplus. If there are more exports than imports then there is a current account surplus. If there are more exports than imports then there is a deficit. A government wants a current account surplus to gain more money to make the country develop. A current account deficit is not necessarily a problem if the government can attract inflows from other countries. In the long term a government will try to make the current account to be balanced meaning Governments will try to have a surplus to pay off the deficit . The Government can influence the current account by making trade barriers, protecting domestic producers, subsidies, encourage consumers to buy domestic products, contractionary fiscal policy, raise interest rates and allow the exchange rate to depreciate.
In conclusions governments will want to influence the current account to create a current account surplus.
The “balance of payments” is a financial system that sets out the monetary transactions between a country and the rest of the world in a period of time. That system includes 3 main parts. Capital account measures payments involving the sale of capital goods or fixed assets such as building and machinery. Financial account measures payments, loans, loans, repayments and the sale of shares. The main account is Current Account that measures payments for visible and invisible exports and imports plus net income flows and transfers.
ReplyDeleteIn the measurements there are 4 main elements: current transfers, income flows, trade in services, trade in goods. In this elements trade in goods is called “visible” and in services is called “invisible”.
For the government the Current Account is very important because it says whether the country is in deficit or surplus and by changing the Current Account the government can get into the surplus. If the amount of money going out of the economy by imports (goods and services bought form another country) exceeds money from exports (goods and services sold to another country) then it is leading to deficit. The payment for exports is called credit and for imports is called debit. Also we shouldn’t forget take into account the Income Flows that include wages earned be residents working overseas or wages paid to foreign workers and any international payments of interest, profits or dividends and also Current transfers that are payments (debits) which go abroad such as taxes and excise payable to the EU and contribution to the EU budget and payments received (credits) such as EU subsidies.
Many countries run deficits in their account, because if some countries exports exceed imports, then other countries have opposite, but that is not a problem for a period of time as log as the country is able to attract inflows of capital form countries with surplus, and a country has a larger economy. However it can cause problems for smaller economies in the long term
In the longer term the government will always try and make the account balance so if a country has a few years of deficits then it will need to turn into surplus so that the economy is not going to fall.
To influence the Current Account the government can firstly decrease the imports by putting trade barriers and very similar way is using taxes on imports. We can do opposite thing- influencing consumers by encouraging them to buy goods produced inside the economy. The government can use the contractionary fiscal policy, by raising taxes and cutting spending the government can reduce total demand for import compared to exports. Another way is central bank increasing interest rates so that the other banks are going to do it as well and by that attract an inflow of saving from abroad as well as reducing domestic borrowing by consumers otherwise they can spend it on imports. The last one is to allow exchange rate to depreciate, the currency will fall, so imports are going to become more expensive where as exports cheaper so that the demand for imports fall and for exports increase.
The balance of payments is a financial system that sets out the monetary transactions between a country and the rest of the word in a particular period of time. The balance of payments is composed of three different parts: the current account, the capital account and the financial account. The current account measures payments for the visible and invisible imports and exports plus net income flows and transfers. The capital account measures payments involving the sale of capital goods or fixed assets such as buildings and machinery. The financial account measures flows including loans and payments and loan repayments, and the sale of shares.
ReplyDeleteThere are four main elements of the current account: trade in goods (visible) and services (invisibles), income flows and current transfers. An export is a good or service sold abroad in return for payments, inflow of money into the country. An import is a good or service that is being bought and brought from another country. It leads to outflows of money from the economy. A surplus is when more is being brought in than going out and a deficit is when more money is going out than being brought in. Income flows include the wages earned by residents working abroad or wages paid to foreign workers and any other international payment, interest, profit. Finally current transfers are payments which go abroad such as taxes to the EU.A trade in goods is called visible items and a trade in services is called invisible items.
How governments influence a country is: to create trade barriers there are used to restrict imported goods. They protect domestic producers by the use of taxation. They use the creation of subsidies, domestic industries to give them a competition advantage; they encourage consumers to buy domestically produced items. They use the Contractionary fiscal policy; this is raising taxes and cutting spending. The government can reduce demand for imports compared to exports. They raise interest rates to attract the inflow of saving. Finally they allow exchange rate to deficit.
The balance of payments is a financial system that sets out the monetary transactions between a country and the rest of the world in a particular period of time. It has 3 main types: current account, capital account and financial account.
ReplyDeleteThe capital account measures payments involving the sale of capital goods or fixed assets such as building machinery.
The financial account measures flow including loans and payments and loan repayments, and the sale of shares.
The current account measures payments for visible and invisible imports and exportsplus net income flows and transfers.
The most important one is the current account. It has 4 main elements: trade in goods, trade in services, income flows and current transfers.
However, in the balance of payments, trade in goods (or physical products) are called visible items and trade in services are called invisible.
Income flows include wages earned by residents working overseas or wages paid to foreign workers and any international payments or interest, profits or dividends.
Current transfers are payments wich go abroad such as taxes and excise payable to the European union and contributions to the EU budget. Also, payments received such as EU subsidies.
If the value of exports is great than the value of imports there is said to be a current account surplus.
Many countries run deficits in their current accounts. For example in 2008 the countries with the largest deficits were the US ($731,214 billion), Spain ($145,141 billion) and the UK ($105,224 billion).
A deficit in the current account of the balance of payments is not neccesarilly a problem as long as the country is able to attract inflows of capital from countries with a surplus, and a country has a large economy. It can however cause problems for smaller economies in the long term.
In the longer term the governments will allways try and make the accounts balance. In other words, if you have few years of deficits (because your exports were not competitive enough) , the governments would want to turn this into surpluses in succeeding years, to pay off he deficits but what actions can the gov. take to keep the economy internationally competitive?
It will put trade barriers, protect domestic producers, put subsidies, encourage consumers to buy domestically produced products, contractionary fiscal policy, raise interest rates and finally allow exchange rate to depreciate.
The Balance of Payments is a record of all transactions made between one particular country and all other countries during a specified period of time, and can be used as an indicator of economic and political stability.
ReplyDeleteThe Balance of Payments has 3 main parts:
The Capital Account - this measures payments involving the sale of of capital goods or fixed assets such as buildings and machinery.
The Financial Account - measures flows including loans and payments and loan repayments, and the sale of shares.
An Export is a good or service sold to another country in return for payments, leading to inflows of money into the economy.
An Import is a good or service bought from another country, leading to outflows of money from the economy.
It is also important to note that trade in goods (physical products) are called visible items, and trade in services are called invisible items.
The Current account measures payments for visible and invisible imports and exports plus net income flows and transfers, and is the most important out of the Capital, Financial and Current account.
The Current Account has 4 main elements:
Trade in Goods (visibles)
Trade in Services (invisibles)
Income flows - include wages earned by residents working overseas or wages payed to foreign workers.
Current transfers - payments which go abroad such as taxes and excise payable to the EU, also payments received such as EU subsidies.
A trade deficit will occur if visible imports exceed visible exports, which has a number of problems.
It means people are buying more imports and spending less on products.
The deficit may be the symptom of a declining industrial base in the country.
The foreign exchange rate for the country is likely to fall.
If there are more exports than imports, it is a surplus.
The government will always try to make the account balance. They can do this in a number of ways:
Trade Barriers to restrict imported goods
Protect domestic producers
Subsidise domestic industries to give them an advantage
Encourage consumers to buy domestically produced products
Contractionary fiscal policy - raise taxes and cut spending to reduce total demand for imports
Raise interest rates to attract and inflow of savings from abroad
Allow exchange rate to depreciate - imports more expensive but exports cheaper
well done everyone.....
ReplyDeleteThe second part of the question was not as well answered here.
Here are your marks:
Sara: A-
You could have made your answer flow a little better. try and keep referring to the question so that it dosent feel like you are re writing my notes!
Felipe: B
A good start but too brief an explanation in the second part of the question.
Sanzhar: A
Excellent answer. Need to mention more about trade barriers and subsidies to get the A*
Emeline: B
A good answer but a bit lacking in description and explanation for the higher mark.More needed on the final section of the question.
Ibon: B+
An excellent first half of the question with great use of statistics (well done). The explanation of how the government might influence the B of P was too short and rushed. Good answer overall Ibon and very encouraging homework. Keep it up.
Sam: C-
A poor answer from you Sam. It looks to me like you have done this homework in a rush. Too much listing of facts and no real attempt to pull it all together with reference to the question. The final section was weak. This is well below what you are capable of Sam, please try harder next time.
Altair:F
very poor answer with no attempt to finish the question. If you have a problem with anything, please come and see me sooner and i can provide help to answer the questions.
Marcos:A*
Excellent answer Marcos. Well written and full of detail which you related well to the question.