2:1:4 - Measure Of Economic Performance - Balance Of Payments

Question 1

What is meant by the balance of payments?

Answer 1

The balance of payments is a record of payments between one country and the rest of the world.

Question 2

What does the balance of payments consist of?

Answer 2

• Current Account
• Financial account
• Capital account

Question 3

What is the most significant account of the balance of payments?

Answer 3

Current account

Question 4

What is meant by the current account?

Answer 4

The current account records trading goods and services, investment, income and current transfers

Question 5

What does trading goods measure?

Answer 5

Measures the movement of tangible products across international borders.

Question 6

What are the U.K.’s main exports?

Answer 6

Pharmaceuticals and Cars

Question 7

What does the UK import a lot of?

Answer 7

Oil and gas

Question 8

What is meant by trade in services?

Answer 8

Measures movement of intangible output.

Question 9

What is meant by investment income?

Answer 9

The reward for investments in other countries.

Question 10

What kind of rewards for investments does investment income comprise of?

Answer 10

Interest, profit and dividends

Question 11

What is meant by current transfers?

Answer 11

The payment of money across international boundaries but has no corresponding output.

EG - Tax is paid to the EU, payments to the British military working abroad.

Question 12

What is meant by a current account surplus?

Answer 12

Where inflows on the current account of the balance of payments are greater than outflows.

Question 13

What is meant by a current account deficit?

Answer 13

Where outflows in the current account of the balance of payments are greater than inflows.

Question 14

Give three examples of countries that have current account deficits?

Answer 14

USA, Spain and the UK

Question 15

Is investment income part of the current account?

Answer 15

Yes

Question 16

Current transfer as part of the current account?

Answer 16

Yes

Question 17

Is current account surpluses and deficits part of the current account?

Answer 17

Yes

Question 18

What is meant by the financial account?

Answer 18

Records money flows for investment purposes, foreign direct investment and foreign portfolio investment.

Question 19

What is meant by foreign direct investment?

Answer 19

Buying out assets and ownership of companies in other countries

Question 20

What is meant by foreign portfolio investment?

Answer 20

Hot money flows

Question 21

What is meant by the capital account?

Answer 21

It puts the financial and current account in balance by recording the changes in net assets in each country.

Question 22

If there is a deficit on the current account is it a problem for the economy?

Answer 22

No as long as the capital and financial accounts are running surpluses to cancel out the deficit.

Question 23

What does a deficit of the current account show?

Answer 23

It can be a sign that living standards are improving.

Question 24

What is meant by foreign currency reserves?

Answer 24

Is when one country holds a currency of another country. (Saving another currency to potentially spend)

Question 25

When does the current account become a problem?

Answer 25

When reserves of foreign currency is beginning to run low.

Question 26

What happens if there is a deficit on the current account and reserves of foreign currencies become low?

Answer 26

• Depreciation of the currency (Which will then lead to inflation)
  – It might be a sign that the country is becoming on competitive (costs are rising relative to trade partners)
  – Which can cause unemployment in the domestic economy

Question 27

How can the government stop a current account deficit?

Answer 27

Higher taxes and cuts in government spending (however it is likely to cause a slowdown in economic growth)

Question 28

What is meant by international trade?

Answer 28

It means that countries become more independent, relying on each other both for income (through exports) and for resources, goods and services (through imports)

Question 29

Interconnectedness of economies – what will happen to one country if another experience is weak demand?

Answer 29

It has a direct effect on another country

Question 30

When does interconnectedness of economies through international trade become a problem?

Answer 30

When deficits or surpluses on the current account to become persistent.

Question 31

What do we call a deficit or surplus on the current account?

Answer 31

A current account imbalance.

Question 32

What could be the cause of current-account imbalance?

Answer 32

– The country is spending too much
– Or a countries stage in the business cycle
– or the strength of the currency

Question 33

Why may the UK face an ongoing deficit?

Answer 33

Because of the higher costs of production in the manufacturing sector of the UK.

Question 34

When do the costs of the current account imbalance becomes significant?

Answer 34

Only when the deficit (or surplus) becomes unsustainable.

Question 35

What is meant by sustainability?

Answer 35

Means that the needs of the present I met without compromising the Ability of future generations to meet their own needs.

Question 36

What can a persistent deficit due to a country’s currency?

Answer 36

Cause it to depreciate in value

Question 37

What can a government do to prevent a persistent deficit and prevent the depreciation of its currency?

Answer 37

The government can buy surplus currency in order to reduce supply and maintain its value.

Question 38

When there is a persistent deficit the currency depreciates, What will a depreciation in the currency do?

Answer 38

• It will restore competitiveness

• Because imports seem more expensive and exports relatively cheap on international markets

Question 39

What will happen to net incomes if there is a persistent deficit?

Answer 39

• Net Income leaves the country
• Demand in that country decreases
• Because of this workers may lose there jobs
  • However; the Monetary Policy Committee May think it’s good as they prevent inflation.