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What students need to learn:
definition of current account on the balance of payments
current account deficits and surpluses
trade in goods (visibles) and services (invisibles)
relationship between current account and exchange rates
examples of real-world exchange rates
reasons for deficits and surpluses: quality of domestic goods, quality of foreign goods, price of domestic goods, price of foreign goods, exchange rates between countries.
• impact of current account deficit:
leakage from the economy, and thus lower GDP
low demand for our exports
problems finding foreign reserves to fund the deficit.
The purpose of the balance of payments is a record of all financial dealings with other countries.
CURRENT ACCOUNT
The part of the balance of payments accounts where the value of exports and imports is recorded.
WHAT THE CURRENT ACCOUNT MIGHT LOOK LIKE
UK’s CURRENT ACCOUNT 2002 £billion
VISIBLE EXPORTS 700
VISIBLE IMPORTS 800
VISIBLE BALANCE (sometimes known as the "Balance of Trade") - 100
INVISIBLE EXPORTS 300
INVISIBLE IMPORTS 100
INVISIBLE BALANCE + 200
OTHER INCOMES FROM ABROAD (NET)+200 =
CURRENT ACCOUNT BALANCE +300
In this case the UK is importing more goods (visibles) than it is exporting. However, it is exporting more services (invisibles) than it is importing. Overall, the positive invisible balance outweighs the negative balance of trade and the UK has a healthy, positive current balance.
Student task:
BOFP Activity.pdf
WHY HAS THE UK A DEFICIT (-) ON CURRENT ACCOUNT?
WHY HAS THE UK A DEFICIT (-) ON CURRENT ACCOUNT?
Poor quality of domestic goods
Poor price competitiveness (inflation?)
Decline in manufacturing therefore fewer goods to export ("deindustrialisation")
High exchange rate £. This makes it more difficult to export but easier to import
Economic growth and high incomes in the UK means that consumers and businesses have more money to spend on imports.
Problems of deficits/surplus
the major problem of a deficit is that countries need to borrow money or attract in savings from abroad. Why might this be a problem?
Loss of domestic output as consumers prefer imports
Higher unemployment and lower economic growth
traditionally a deficit is seen as worse than a surplus but remember that a large surplus means that someone has a large deficit. Will that country always be able to afford your exports?
Given the causes of a balance of payments deficit, list how a country could try to reduce this deficit
Students to present case study of chosen country.
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