1) Balance of payments - MB

Question 1

Define balance of payments

Answer 1

A set of accounts showing the transactions conducted between residents of a country and the rest of the world

Question 2

Define current account of the balance of payments

Answer 2

Account identifying transactions in goods and services between the residents of a country and the rest of the world, together with income payments and international transfers

Question 3

Define the financial account of the balance of payments

Answer 3

Account identifying transactions in financial assets between the residents of a country and the rest of the world

Question 4

Define the capital account of the balance of payments

Answer 4

Account identifying transactions in (physical) capital between the residents of a country and the rest of the world

Question 5

Define credit

Answer 5

Money flowing into the country from a transaction

Question 6

Define debit

Answer 6

Money flowing out of the country from a transaction

Question 7

What currency are imports bought with?

Answer 7

Imports are bought using that country’s currency

Question 8

How does a country pay for imports?

Answer 8

To pay for those imports, there must be a way of getting that currency, like exports

Question 9

What does the balance of payments need to be?

Answer 9

The balance of payments, as a record of all these credits and debits, must be zero

Question 10

What 3 things are the balance of payments comprised of?

Answer 10

1) the current account
2) the financial account
3) the capital account

Question 11

What is the current account comprised of?

Answer 11

Trade in goods and services, primary income and secondary income (transfers)

Question 12

What is trade in goods and services?

Answer 12

It is the balance between imports and exports

Question 13

Why could the sum of all countries’ trade balance not be zero?

Answer 13

As UK exports become imports of trading partners, the sum of all countries’ trade balances should be zero - but it may not due to errors and omissions

Question 14

What is primary income?

Answer 14

Is the best result of employment income from abroad, and income earned by domestic citizens on past investment abroad (less income earned by overseas residents who own assets in the UK)

Question 15

What is secondary income?

Answer 15

Made up of current transfers including taxes received from non-resident workers and businesses, remittances (money sent back), bilateral aid flows (cash money to other countries) and military grants

Question 16

What are bilateral aid flows?

Answer 16

Cash money to other countries

Question 17

What is the financial account comprised of?

Answer 17

Foreign direct investment (FDI), portfolio investment, transactions in other financial assets and reserve assets

Question 18

What is FDI?

Answer 18

Where UK investors undertake investment overseas, and overseas investors purchase assets in the UK

Question 19

What is portfolio investment?

Answer 19

Is a category including equities

Question 20

What do ‘other financial assets’ include?

Answer 20

Include securities, derivatives (such as options and futures)

Question 21

What are reserved assets?

Answer 21

They include gold and foreign exchange held by the Bank of England

Question 22

When are reserve assets important?

Answer 22

Important when a fixed exchange rate was used, less so since the exchange rate has floated

Question 23

What is the capital account?

Answer 23

It is relatively small, and reflects changes to the status of migrants, and where their assets should be recorded

Question 24

How does the capital account work?

Answer 24

If a migrant to the UK moves from being a non-resident to a resident, their property becomes part of the UK’s assets, and this is recorded in the balance of payments