Back

Current Account of Balance of Payments | O Level Economics 2281 & IGCSE Economics 0455 | Detailed Free Notes To Score An A Star (A*)

Views 0
  • All monetary transactions between residents of one country and the rest of the world
    • Balance of payments
    • 3 main divisions
  • Current Account
    • Visible trade
      • Tangible products – trade in goods
    • Invisible trade
      • Intangible products – trade in services
    • Net Income or Net Primary Income
      • Income debits (outflows of cash)
      • Income credits (Inflow of cash)
      • From interest, wages, dividends, profits
      • Income received- paid = net income received
    • Net current transfers
      • Governmental payments for interactional transactions
      • Net secondary income for non productive activities
        • Debits outflows
        • Credit inflows
        • Donation, aid, pension, grants
      • Net transfers = received – paid
  • Current Account Deficit
    • Outflows exceed inflows in current account
      • Reasons
        • Higher exchange rates
          • Imports cheater so more imports done
          • Exports expensive so uncompetitive so exports fall
        • Economic growth
          • Increased aggregate demand and national cineom will make more consumer goods spending
          • Therefore, imports increase
        • Decline in competitiveness
          • Lack of competitive industries will result in deficit
        • Inflation
          • Exports expensive so low
        • Recession in other countries
          • They can’t afford imports
        • Borrowing
          • It will increase deficit in interest payments etc.
  • Consequences
    • Growth falls due to lower aggregate demands
    • Unemployment and consumer spending falls
    • Standard of living falls
    • Capital outflow increases
    • Foreign exchange reserves will fall due to more imports
    • Borrowing increases and current deficit increase as well
    • Exchange rate falls as demand for export falls and imports rise
  • How to correct current account deficit
    • Floating exchange rate
      • automatic depreciation and appreciation to set the market for exports and imports
      • Contractionary fiscal policy
        • Less government spending will reduce the imports and balance the trade
      • Contractionary monetary policy
        • Less money supply in the market which means less spending, less inflation  and exchange rate devalued to increase competitiveness
      • Protectionism
        • It is important but it can lead to retaliation
  • Current Account Surplus
    • Causes
      • More competitive products
      • Growth of foreign economies so they need more imports
      • High foreign direct investment  so export grows
      • Currency depreciation – so exports cheaper and imports expensive
      • Savings rate high in domestic market
        • So less consumption less imports
      • Closed economy
        • No imports or minimal imports
    • Consequences
      • Economic growth and GDP rise
      • Appreciation of currency as exports increase
      • Employment as exports increase so export industries increase
      • Better standard of living as net transfers increase and export revenue increases
      • Inflation will occur as demand pull inflation occurs and international competitiveness falls
  • How to correct it
    • Floating exchange rate
    • Expansionary fiscal policy
    • Expansionary monetary policy
    • Increase competitiveness by removing protectionism
Hunain Zia

Hunain Zia has previously achieved considerable success in the high-school educational stream, gaining a massive 154 Total A Grades and 7 Major Distinctions, a process in which he broke/ set 11 different world records, including the most A grades ever achieved, most subjects ever appeared in, most distinctions, gaining distinctions across two separate boards (Pearson Edexcel and CAIE) within the same year/ ever, and even 19 hours of constant examination. All records stand intact today. Hunain pursued his Honors Accounting Degree from the prestigious Bentley University, and then completed an LLB (in Honors) from University of London. Currently, he manages multiple social and commercial projects, has founded digital streams and works tirelessly in the education sector.

Educate A Change focuses on truly bringing change in the educational sector worldwide. All our courses are designed to ensure success, and provide complete preparation without requiring any other external material. Therefore, it takes away the expense of academies, books, past paper compilations and other miscellaneous items. Instead, by just the courses we offer, the student can prepare fully for the best grades in their CAIEs, Edexcel and other high-school exams. The earnings from our course-sales are invested in social projects and growing the free educational activities of Educate A Change.