A2 Macroeconomics - Revision on the Balance of Payments

1. The Balance of Payments EdExcel A2 Macro – June 2016

2. • 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

3. • 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

4. 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)

5. • 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

6. The Major Export (Goods) for each country in the World in 2014

7. Current account surplus countries (Measured as a % of GDP, Source IMF) Country 2013 2014 2015 Singapore 17.9 19.1 20.8 Taiwan Province of China 10.8 12.4 12.4 Netherlands 10.8 10.2 9.6 Kuwait 41.2 31.0 9.3 Germany 6.4 7.4 8.5 Switzerland 11.1 7.3 7.2 Korea 6.2 6.3 7.1 Denmark 7.2 6.3 7.0 Norway 10.0 9.4 7.0 Sweden 6.7 6.2 6.7 Slovenia 5.6 7.0 6.7 Thailand -0.9 3.3 6.2 Qatar 30.9 26.1 5.0 Ireland 3.1 3.6 3.2 China 1.6 2.1 3.1 Azerbaijan 16.4 14.1 3.0 Japan 0.8 0.5 3.0

8. Causes of current account surplusesStructural Surplus 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 Cyclical 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

9. Causes of current account surplusesStructural Surplus 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 Cyclical 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

10. R&D Spending and Scientists per Million People – By Country (2013)

11. 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

12. 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 1,066.3 1,528.2 1,946 2,399.2 2,847.3 3,181.1 3,311.6 3,821.3 3,843 0 500 1000 1500 2000 2500 3000 3500 4000 4500 2006 2007 2008 2009 2010 2011 2012 2013 2014 ForeignexchangereservesinbillionU.S.dollars 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

13. 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

14. 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

15. Causes of current account deficitsStructural Under-investment Relatively low productivity Persistently high relative inflation Inadequate R&D, innovation Emergence of lower cost competition Cyclical Over-valued exchange rate Boom in domestic demand Recession in key export markets Slump in global prices of exports Increased demand for imported technology

16. Causes of current account deficitsStructural Under-investment Relatively low productivity Persistently high relative inflation Inadequate R&D, innovation Emergence of lower cost competition Cyclical Over-valued exchange rate Boom in domestic demand Recession in key export markets Slump in global prices of exports Increased demand for imported technology

17. 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?

18. 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

19. 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

20. 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

21. Annual UK Trade Balance in Goods and Services Source: Office for National Statistics -50000 -40000 -30000 -20000 -10000 0 10000 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Trade in Goods & Services: Total balance: £million

22. UK Trade and Current Account Balance (% of GDP) -7.0 -6.0 -5.0 -4.0 -3.0 -2.0 -1.0 0.0 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 2010Q4 2011Q1 2011Q2 2011Q3 2011Q4 2012Q1 2012Q2 2012Q3 2012Q4 2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2 2014Q3 2014Q4 2015Q1 2015Q2 2015Q3 2015Q4 Trade balance (%, GDP) Current account balance (% 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

23. 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

24. The Balance of Payments EdExcel A2 Macro – June 2016

A2 Macroeconomics - Revision on the Balance of Payments

A2 Macroeconomics - Revision on the Balance of Payments

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A2 Macroeconomics - Revision on the Balance of Payments

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