<6.4 CURRENT ACCOUNT & BALANCE OF PAYMENTS>

--STRUCTURE OF THE CA--

--THE CURRENT ACCOUNT--

The CURRENT ACCOUNT is a record that shows the INCOME RECEIVED by a country and the EXPENDITURE MADE by it in its financial dealings with other countries.
It is usually divided into FOUR components.
Money INFLOWS are recorded as CREDIT items and money OUTFLOWS as DEBIT items.

--INFLOW--

--OUTFLOW--

--TRADE IN GOODS--

This covers exports and imports of GOODS including CARS, FOOD, and MACHINERY. Such goods are sometimes referred to as MERCHANDISE or VISIBLE EXPORTS and IMPORTS.
EXPORT REVENUE is an INFLOW / CREDIT ITEM (+) on the CA.
IMPORT EXPENDITURE is an OUTFLOW / DEBIT ITEM (-) on the CA.
- - - - If EXPORT REVENUE is 'GREATER THAN' the IMPORT EXPENDITURE, the country is said to have a TRADE IN GOODS SURPLUS.
      - If EXPORT REVENUE is 'LESS THAN' the IMPORT EXPENDITURE, the country is said to have a TRADE IN GOODS DEFICIT.

--TRADE IN SERVICES--

This covers exports and imports of SERVICES including BANKING, TRAVEL, and FINANCIAL SERVICES. Such services are sometimes referred to as INVISIBLE EXPORTS & IMPORTS.
- EXPORT REVENUE is an INFLOW / CREDIT ITEM (+) on the CA.
- IMPORT EXPENDITURE is an OUTFLOW / DEBIT ITEM (-) on the CA.
  - - - If EXPORT REVENUE is 'GREATER THAN' the IMPORT EXPENDITURE, the country is said to have a TRADE IN SERVICES SURPLUS.
        If EXPORT REVENUE is 'LESS THAN' the IMPORT EXPENDITURE, the country is said to have a TRADE IN SERVICES DEFICIT.

--PRIMARY INCOME--

The PRIMARY INCOME section of the current account records all the flows between residents and non-residents that result from the OWNERSHIP OF FACTORS OF PRODUCTION such as WAGES and RENT as well as from the PROVISION OF FINANCIAL ASSETS and LIABILITIES such as DIVIDENDS, PROFITS, and INTEREST:
- - WAGES & SALARIES: This component records INCOME EARNED by residents from employment or work performed abroad (exports of labour services) and income earned by non-residents from employment or work performed within the country (imports of labour services).
    - - Example: A Singaporean engineer works for a multinational company based in the United States. The engineer receives a monthly salary of $5,000 for their work. This salary is considered wages earned by the Singaporean resident from employment abroad (export of labour services). It would be recorded as a credit item in Singapore's primary income account.
  - PROFITS & DIVIDENDS: This component accounts for INCOME EARNED by residents from their investments in foreign companies, including profits, dividends, and retained earnings. Similarly, it includes income earned by non-residents from their investments in domestic companies.
    - - Example: A Singaporean investor owns shares in a multinational corporation headquartered in Europe. The company declares an annual dividend of $2 per share, and the investor owns 1,000 shares. Therefore, the investor receives $2,000 in dividends from their investment. This dividend income represents profits and dividends earned by a Singapore resident from their investment in a foreign company and would be recorded as a credit item in Singapore's primary income account.
  - INTEREST INCOME: This part of the primary income section records INCOME EARNED by residents from their ownership of financial assets (such as bonds and loans) issued by foreign entities and income earned by non-residents from their ownership of financial assets issued by domestic entities.
    - - Example: A Singaporean individual holds government bonds issued by the United Kingdom. The bonds pay an annual interest rate of 3%, and the individual holds $50,000 worth of bonds. Therefore, the individual earns $1,500 in interest income ($50,000 * 3%). This interest income represents income earned by a Singapore resident from their ownership of financial assets issued by a foreign entity and would be recorded as a credit item in Singapore's primary income account.
  - RENTAL INCOME: This component includes INCOME EARNED by residents from the use of their property or natural resources by non-residents (such as rent from foreign-owned properties) and income earned by non-residents from the use of property or natural resources owned by residents.
    - - Example: A Singaporean landlord rents out an apartment to an expatriate family from China. The monthly rent for the apartment is $2,500. Therefore, the landlord earns $2,500 per month in rental income from the property. This rental income represents income earned by a Singapore resident from the use of their property by non-residents and would be recorded as a credit item in Singapore's primary income account.
The PRIMARY INCOME BALANCE, refers to the 'NET FLOW OF PRIMARY TRANSFERS'.

--SECONDARY INCOME--

These refer to TRANSFERS of money, goods or services which are sent out of the country or come into the country, NOT IN RETURN FOR ANYTHING ELSE. For example GIFTS, CHARITABLE DONATIONS, AID and REMITTANCES (Payments from people living and working overseas and sending money back to country of origin, in other words NON-EARNED INCOME).
The SECONDARY INCOME BALANCE, refers to the 'NET FLOW OF SECONDARY TRANSFERS'.

--TASK--

ANSWER:

TRADE IN GOODS = $19,618m - $24,900m = -$5,282

TRADE IN SERVICES = $2,121m - $4,074 = -$1,953

a) BALANCE OF TRADE IN G & S = -$7235

TRADE IN GOODS $1,041,438 - $1,075,850 = -$34,412

TRADE IN SERVICES $191,656 - $197,643 = -$5,987

PRIMARY -$100,366

SECONDARY - $33,533

b) CA BALANCE = -$174,298m

--6.4.2 CAUSES: CA DEFICIT & SURPLUS--

--TRADE BALANCE (X-M)--

--DEFICIT (X<M)--

--SURPLUS (X>M)--

--HIGH INFLATION--

When the economy's RELATIVE INFLATION RATE RISES, then their EXPORTS BECOME MORE EXPENSIVE, while IMPORTS become CHEAPER hence WORSENING the trade balance.

--LOW INFLATION--

When the economy's RELATIVE INFLATION RATE FALLS, then their EXPORTS BECOME CHEAPER, while IMPORTS become MORE EXPENSIVE, hence IMPROVING the trade balance.

--RISING X-RATE--

A RISING (Appreciating or Revalued) exchange rate will make EXPORTS MORE EXPENSIVE and IMPORTS CHEAPER, hence WORSONING the trade balance.

--FALLING X-RATE--

A FALLING (Depreciating or Devalued) exchange rate will make EXPORTS CHEAPER and IMPORTS more EXPENSIVE, hence IMPROVING trade balance.

--RISING DOMESTIC GDP--

When DOM. INCOME INCREASES, there is naturally a greater level of consumer spending, which includes MORE IMPORTS, and without an equal increase in exports, the trade balance will WORSEN.

--RISING FOREIGN GDP--

When FOREIGN INCOME INCREASES, they naturally have a GREATER DEMAND for your EXPORTS (Their imports) hence the trade balance will IMPROVE.

--FREE TRADE--

The FEWER BARRIERS TO TRADE (The 'freer the trade'), a country has, the MORE COMPETITION they will face from IMPORTS, hence the spending on IMPORTS may RISE, however, it could also be true that EXPORTS also RISE, so the trade balance may WORSEN or IMPROVE.

--PROTECTONISM--

The MORE BARRIERS TO TRADE, a country has E.G. TARIFF, the MORE EXPENSIVE IMPORTS become, hence the trade balance may IMPROVE however, it could also be true that other countries may also erect barriers and EXPORTS will FALL, so the trade balance may WORSEN or IMPROVE.

--FALLING PRODUCTIVITY--

The LESS PRODUCTIVE a country’s workers are, the HIGHER the labour COSTS PER UNIT and THE MORE EXPENSIVE ITS PRODUCTS. A FALL in PRODUCTIVITY, therefore, is likely to lead to LESS domestic and foreign demand – so EXPORTS should FALL and IMPORTS RISE thus WORSENING the trade balance.

--RISING PRODUCTIVITY--

The MORE PRODUCTIVE a country’s workers are, the LOWER the labour COSTS PER UNIT and THE CHEAPER ITS PRODUCTS. A RISE in PRODUCTIVITY, therefore, is likely to lead to MORE domestic and foreign demand – so EXPORTS should RISE and IMPORTS FALL thus IMPROVING the trade balance.

--FALLING QUALITY--

A FALL IN RELATIVE QUALITY of a country’s products,, would have an ADVERSE effect on the country’s balance of trade in goods and services, as EXPORTS will FALL, and IMPORTS will RISE, hence WORSENING the trade balance.

--RISING QUALITY--

A RISE IN RELATIVE QUALITY of a country’s products,, would have an POSITIVE effect on the country’s balance of trade in goods and services, as EXPORTS will RISE, and IMPORTS will FALL, hence IMPROVING the trade balance.

--PRIMARY INCOME--

--DEFICIT--

--SURPLUS--

--NEG. INVEST INCOME--

The combined investment income (Interest + Profits + Dividends) EARNED FROM ABROAD (credits) are LESS THAN the combined investment income of foreigners SENT ABROAD (debits)

--POS. INVEST INCOME--

The combined investment income (Interest + Profits + Dividends) EARNED FROM ABROAD (credits) are GREATER THAN the combined investment income of foreigners SENT ABROAD (debits).

--NEG. WORKERS COMP.--

Singaporean workers' wages and salaries earned overseas and sent back to Singapore WERE MORE THAN the wages and salaries earned by foreigners working in Singapore and sent back to their home countries.

--POS. WORKERS COMP.--

Singaporean workers' wages and salaries earned overseas and sent back to Singapore WERE LESS THAN the wages and salaries earned by foreigners working in Singapore and sent back to their home countries.

--SECONDARY INCOME--

--DEFICIT--

--SURPLUS--

--NEG. REMITTANCES--

The economy’s workers working abroad may be sending LESS money home to relatives than foreign migrant workers are sending to their relatives.

--POS. REMITTANCES--

The economy’s workers working abroad may be sending MORE money home to relatives than foreign migrant workers are sending to their relatives.

--6.4.3 CONSEQUENCES

--DEFICIT--

--SURPLUS--

--LOW GDP--

A CA DEFICIT implies a FALL in NX, which is a component of AD, hence GDP will FALL.

--HIGH GDP--

A CA SURPLUS implies a RISE in NX, which is a component of AD, hence GDP will RISE.

--LOW EMPLOYMENT--

FALLING GDP, means FEWER workers are needed hence HIGHER UNEMPLOYMENT.

--HIGH EMPLOYMENT--

RISING GDP, means MORE workers are needed hence LOWER UNEMPLOYMENT.

--LOW INFLATION--

FALLING GDP, means LESS AD, hence putting DOWNWARD PRESSURE on the AVERAGE PRICE LEVEL reducing INFLATION.

--HIGH INFLATION--

RISING GDP, means MORE AD, hence putting UPWARD PRESSURE on the AVERAGE PRICE LEVEL increasing the risk of DEMAND-PULL INFLATION.

--DEPRECIATION--

As NX FALLS, there is LESS DEMAND for the country's EXPORTS, hence there is LESS DEMAND for its CURRENCY, leading to a DEPRECIATION.

--APPRECIATION --

As NX RISES, there is MORE DEMAND for the country's EXPORTS, hence there is MORE DEMAND for its CURRENCY, leading to a APPRECIATION.

--IS A CA DEFICIT SERIOUS?--

A current account deficit may mean that a country is consuming more goods and services than what it is producing. This is sometimes referred to as a ‘country living beyond its means’. A current account deficit can also mean a reduction in inflationary pressure, as there will be a fall in aggregate demand.
A current account deficit does, however, mean that output and employment is lower than possible. If more goods and services were to be produced at home, more workers would be employed.
The significance of a current account deficit depends on its size, duration and cause. A small deficit that lasts for only a short time is unlikely to cause any problem. A deficit that has been caused by the import of raw materials and capital goods, changes in income (domestic and foreign) or a high exchange rate, is likely to be SELF-CORRECTING OVER TIME (irrespective of its size). Imported raw materials and capital goods will be used to produce goods and services, some of which will be exported. Recessions abroad will not last and with a rise in incomes, the country can export more to foreign countries. A deficit on the current account will put downward pressure on the exchange rate. If it does fall, exports will become cheaper and imports will become more expensive – as a result a deficit may be eliminated.
A deficit may also be the result of more primary and secondary income leaving the country than entering it. This may REFLECT A BOOMING ECONOMY, with foreign MNCs making high profits in the country and sending the profits back to their economies and migrant workers earning high wages and sending some of them home to their relatives.
A deficit arising due o a lack of international competitiveness is more serious. This is because it will not be self-correcting. If firms’ costs of production are higher due to lower productivity or the quality of the products produced are poor or the products made are not in high world demand, the deficit may persist. In this case, the government may have to INTRODUCE SUPPLY-SIDE POLICIES to improve its COMPETITIVNESS.

--6.4.4 STABILISING POLICIES--

--DEFICIT--

--SURPLUS--

--REDUCE IMPORT SPENDING--

-INCREASE TRADE BARRIERS: TARIFFS, QUOTAS ETC TI MAKE IMPORTS MORE EXPENSIVE

-LOWER EXCHANGE RATE TO MAKE IMPORTS MORE EXPENSIVE IN DOMESTIC CURRENCY.

-CONTRACTIONARY FISCAL & MONETARY POLICY (HIGHER INCOME TAX AND INTEREST RATES) TO LOWER DISPOSABLE INCOME AND REDUCE SPENDING ON IMPORTS.

-USE SUPPLY-SIDE POLICIES TO INCREASE PRODUCTIVITY AND QUALITY OF DOMESTIC GOODS TO REDUCE DOMESTIC DEMAND FOR IMPORTS.

--INCREASE IMPORT SPENDING--

-DECREASE TRADE BARRIERS: TARIFFS, QUOTAS ETC TO MAKE IMPORTS CHEAPER

-RAISE THE EXCHANGE RATE TO MAKE IMPORTS CHEAPER IN DOMESTIC CURRENCY.

-EXPANSIONARY FISCAL & MONETARY POLICY (LOWER INCOME TAX AND INTEREST RATES) TO RAISE DISPOSABLE INCOME AND INCREASE SPENDING ON IMPORTS.

--INCREASE EXPORT REVENUE--

-LOWER EXCHANGE RATE TO MAKE EXPORTS CHEAPER IN FOREIGN CURRENCY BOOSTING DEMAND FOR EXPORTS.

-USE SUPPLY-SIDE POLICIES TO INCREASE PRODUCTIVITY AND QUALITY OF DOMESTIC GOODS TO INCREASE COMPETITIVENESS AND BOOST DEMAND FOR EXPORTS.

--DECREASE EXPORT REVENUE--

-RAISE THE EXCHANGE RATE TO MAKE EXPORTS MORE EXPENSIVE IN FOREIGN CURRENCY.

--PAST PAPERS--

--PAPER 1--

--MCQ--

The answer is 'D', we can see that in year 1, China had slightly more exports than imports, and hence had a trade SURPLUS however in year 2 exports were less than imports, therefore they had a trade DEFICIT.

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