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Economics Lecture 12 - 9^th January 2008

Balance of Payments

The Balance of Payments is a record of economic transactions of a country with the rest of the world.

Consists of 3 sections/accounts:

• Current account

• Capital account

• Official financing.

Current account

Malta – find in NSO under press releases.

Exports of merchandise – goods. In Malta: electronic components, textile/clothing, plastics.

Imports of merchandise – electronic components, food, oil.

Malta has a large deficit where deficit is increasing.

Trade in services exports – tourism, transport services, financial services.

Trade in services – Imports, tourism.

In recent years, current account in deficit due to large deficit in man and trade.

Capital account

Has 4 components:

• Foreign direct investment, balance surplus.

• Monetary and financial flows.

• Government borrowing.

• Errors and omissions.

This account was in surplus.

Official Financing

It is a balancing entry where the central bank reduces its reserves if there is an overall deficit in the current and capital accounts.

It shows how reserves increase/decrease.

Why do we need foreign exchange reserves?

• Credit worthiness

• Money for rainy day

• Interest income.

Factors affecting Exports/Imports

Factors influence exports:

• Exchange rate – devalue = more competitive therefore exports increase. Impact on raw materials increase which increases cost of production and consumer goods and increase in wages.

Factors affecting Imports

• GDP

• Exchange rates

• Cost of production

• Economic structure.

Exam

2 hours.

6 or 8 questions to answer 4.

4 micro, 4 macro.

1 question on perfect competition, monopoly, markets. Cost of production to choose 2.

1 question on GDP, Inflation, multiplier, money macro choose 2.

Tricks:

• Write neat

• Diagrams clear

• Give a sentence and then explain in paragraph.

• Leave some time for revision.

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