Section 3.3 Balance of payments - notes
In this section we will look at the structure of the balance of payments and current account deficits and surpluses.
By the end of this section you should be able to:
- Outline the role of the balance of payments.
- Distinguish between debit items and credit items in the balance of payments.
- Explain the four components of the current account, specifically the balance of trade in goods, the balance of trade in services, income and current transfers.
- Distinguish between a current account deficit and a current account surplus.
- Explain the two components of the capital account, specifically capital transfers and transaction in non-produced, non-financial assets.
- Explain the three main components of the financial account, specifically, direct investment, portfolio investment and reserve assets.
- Explain that the current account balance is equal to the sum of the capital account and financial account balances (see the appendix, "The balance of payments").
- Examine how the current account and the financial account are interdependent.
- Explain why a deficit in the current account of the balance of payments may result in downward pressure on the exchange rate of the currency.
- Explain why a surplus in the current account of the balance of payments may result in upward pressure on the exchange rate of the currency.
- Calculate elements of the balance of payments from a set of data.
- Discuss the implications of a persistent current account deficit, referring to factors including foreign ownership of domestic assets, exchange rates, interest rates, indebtedness, international credit ratings and demand management.
- Explain the methods that a government can use to correct a persistent current account deficit, including expenditure switching policies, expenditure reducing policies and supply-side policies, to increase competitiveness.
- Evaluate the effectiveness of the policies to correct a persistent current account deficit.
- State the Marshall-Lerner condition and apply it to explain the effects of depreciation/devaluation.
- Explain the J-curve effect, with reference to the Marshall-Lerner condition.
- Discuss the possible consequences of a rising current account surplus, including lower domestic consumption and investment, as well as the appreciation of the domestic currency and reduced export competitiveness.