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BALANCE OF PAYMENTS
The Balance of Payments is a record of all financial transactions between one
country and other countries
It is made up of two accounts:
The current account
The capital and financial account
A `credit item' is an `incoming item' ­ eg if a car is made in the UK and
exported, the payment is a credit to the UK
A `debit item' is an `outgoing item' ­ eg if a British person buys a bottle of
wine from Italy, the money goes to the Italian manufacturer…read more

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THE CURRENT ACCOUNT
The current account is comprised of the following:
Trade in goods
Value of goods exported minus the value of goods imported
Trade in services
Value of services exported minus the value of services imported
Income balance
Income flows into the country from non-residents minus income flows out of the
country from residents to non-residents
International transfers
Movements of funds for which there is no trade ­ eg. taxes, bilateral aid…read more

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CURRENT ACCOUNT IMBALANCES
Causes of a surplus Causes of a Defecit
· Relatively low labour costs ­ more · Relatively low productivity (output per
competitive (eg. China) worker)
· High quality goods (eg. German cars) · High relative inflation
· Undervalued currency · Overvalued currency
· Ownership of a vital raw material · What they trade ­ UK is mostly service
· Low domestic demand ­ exporting lots based, most of which is traded
· High productivity (output per worker) domestically
· Lax regulations · Low investment in human capital
· Relatively low rates of inflation · High marginal propensity to import
· Access to markets ­ technology and (how likely people are to buy foreign
transport links goods)
· High labour costs (eg. wages)…read more

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THE UK CURRENT ACCOUNT DEFICIT
Has been in deficit every year since 1984
Main reasons include:
High value of sterling (1992-2008)
Continuous economic growth (1992-2008) ­ rising real incomes led to more
imports
Low productivity of UK workers ­ higher costs
Relocation of manufacture to China and India
Imports persistently exceed exports
Transfers with the EU have been in deficit
However, earnings on investment abroad have been increasing
Trade in services is in surplus ­ but this cannot offset the trade in goods
deficit…read more

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CAPITAL AND FINANCIAL ACCOUNT
Comprises transactions associated with changes of ownership of the UK's
foreign financial assets and liabilities
A major influencing factor is Foreign Direct Investment (FDI)
Also included are flows of `hot money' ­ money in search of the highest
short-term rate of return available internationally
In theory, the balance on this account should exactly offset the current
account balance
The UK has a surplus on the financial account ­ this is because they are
selling assets to foreign investors and borrowing abroad to finance the current
account deficit
Is this sustainable in the long run?…read more

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