Revision Webinar - Balance of Payments

Summary

This webinar covers key concepts in A-level economics, focusing on the balance of payments. It starts with multiple-choice questions and their explanations, discussing topics like current accounts, financial accounts, and trade balances. The video explains how foreign investments, exports, and services affect a country's balance of payments, using examples from the UK, Bolivia, and Japan. The presenter also touches on financial policies that influence trade and current account deficits. The session is filled with practical examples, revision tips, and economic theories, offering a thorough review for students preparing for exams.

Takeaways

• 📊 The balance of payments always balances, but individual components like trade or financial accounts may not.
• 🎓 Payments for services like education, such as foreign students paying UK universities, are recorded as service exports on the current account.
• 🛢️ Investment by foreign firms in Bolivia's oil and gas sectors results in uncertainty in the balance of payments due to potential inflows and outflows.
• 🏭 Foreign investment in other countries, such as a Japanese factory in France, is recorded as a capital outflow from Japan.
• 💰 Policies that switch demand from consumption to investment and net exports include lowering interest rates and increasing VAT to stimulate investment and reduce consumer spending.
• 📦 The current account consists of trade in goods and services, net primary income (overseas investments), and net secondary income (aid, EU payments, etc.).
• 💼 The financial account records changes in ownership of assets and liabilities, with foreign direct investment (FDI) and portfolio investment being major components.
• 💷 The UK runs a significant trade deficit in goods, offset partly by a surplus in services, but overall the country needs capital inflows to balance its current account deficit.
• 📉 Countries running current account deficits need financial account surpluses, while surplus countries like China and Germany can run financial account deficits as they export capital.
• 📈 Policies to reduce a balance of payments deficit can include currency depreciation (expenditure switching) or reducing real incomes through higher taxes (expenditure reducing).

Q & A

What was the final value of the UK balance of payments in 2016?

The final value of the UK balance of payments in 2016 was zero. The balance of payments always balances as individual components might not, but the overall balance does.

How is a foreign government paying a UK university to educate its students recorded on the UK balance of payments?

This would be recorded on the current account of the UK's balance of payments as a service export, leading to an inflow of money into the UK.

What impact does foreign investment in Bolivia’s oil and gas sector have on its balance of payments?

There is uncertainty. While Bolivia may receive foreign investment (inflow on the financial account) and export oil and gas (inflow on the current account), profits may leave the country (outflow on the current account).

How is a Japanese car manufacturer establishing a factory in France shown in Japan’s balance of payments?

The investment would be recorded as a capital outflow from Japan. If successful, profits would later flow back to Japan, which would be recorded on the current account.

Which combination of policy measures would help a government shift demand from private consumption to investment and net exports?

A combination of lower interest rates (to stimulate investment and depreciate the currency) and an increase in VAT (to reduce private consumption) would help achieve this goal.

What are the main components of the current account in the balance of payments?

The current account consists of trade in goods, trade in services, net primary income (earnings from overseas investments), and net secondary income (such as aid payments and EU contributions).

What is foreign direct investment (FDI) and how does it affect the balance of payments?

Foreign direct investment (FDI) refers to investment flows into a country’s businesses or assets. Inward FDI is a positive entry on the financial account, while outward FDI is negative.

Why is the financial account significant in the balance of payments?

The financial account records inflows and outflows of capital, such as FDI, portfolio investments, and banking flows. It shows changes in ownership of assets and liabilities between countries.

What are expenditure switching and expenditure reducing policies, and how do they address a balance of payments deficit?

Expenditure switching policies aim to change the relative price of exports and imports (e.g., through currency depreciation or import tariffs). Expenditure reducing policies, like higher taxes or interest rates, aim to reduce overall demand, including for imports.

What does the Marshall-Lerner condition state about exchange rate depreciation and the trade balance?

The Marshall-Lerner condition states that a depreciation of the exchange rate will improve the trade balance if the sum of the price elasticities of demand for exports and imports is greater than one. If it's less than one, the trade balance worsens.