2) Balance Of Payments 2 - MB

Question 1

What are the causes of a deficit on the current account? (Talk about goods and services)

Answer 1

Changes in the structure of economic activity affecting the pattern of trade in goods and services

Question 2

What are the causes of a deficit on the current account? (Talk about competitiveness)

Answer 2

The competitiveness of domestic production relative to other countries

Question 3

What are the causes of a deficit on the current account? (Talk about high domestic inflation)

Answer 3

High domestic inflation reducing exports’ competitiveness

Question 4

What are the causes of a deficit on the current account? (Talk about luxury goods)

Answer 4

Rapid economic growth leading to rising imports of luxury goods

Question 5

What are the causes of a deficit on the current account? (All 4 reasons)

Answer 5

1) changes in the structure of economic activity affecting the pattern of trade in goods and services
2) the competitiveness of domestic production relative to other countries
3) high domestic inflation reducing exports’ competitiveness
4) rapid economic growth leading to rising imports of luxury goods

Question 6

What is an example of changes in the structure of economic activity?

Answer 6

Eg coal is now imported, fewer goods are produced than services in the UK and more imports change in fashion

Question 7

Give an example of rising imports of luxury goods

Answer 7

Eg skiing (buying stuff elsewhere)

Question 8

What does ‘secondary’ mean?

Answer 8

Raw materials into products

Question 9

In the UK how has the pattern of trade changed?

Answer 9

The pattern of trade has changed to fewer goods and now more services, in other words a close to secondary industries and an increase in tercery industries

Question 10

Why are there less farmers in the UK despite growing population?

Answer 10

For to mechanisation, replacing Labour with capital, services have grown much more in the UK, the population has increased more than the farming sector, so now we rely on imports

Question 11

The structure of the UK economy has changed since the mid 80s, how has this impacted the current account?

Answer 11

The deficit in the trade in goods has increased as the UK manufacturing has declined. Although the surplus in the trade in services, particularly insurance and financial services, has grown, the current account deficit has increased

Question 12

Why has the current account’s deficit increased?

Answer 12

Because the value of the increase of the trade in services has been less than the value of the decline of the trade in goods

Question 13

How must the persistent deficit on the current account be financed?

Answer 13

Must be financed by a surplus on the financial and capital accounts

Question 14

The persistent deficit in the current account is financed by a surplus on the financial and capital accounts, how does the UK purchase extra imports?

Answer 14

If UK assets are sold to foreigners then the UK can acquire the foreign currency needed to purchase the extra imports not funded by exports, this is automatic due to the nature of the economy

Question 15

What are 2 disadvantages of the current account?

Answer 15

1) structure
2) ownership

Question 16

Why is the structure of a current account a disadvantage?

Answer 16

Services are not difficult to export than goods. This can be due to language barriers

Question 17

Why is the ownership of a current account a disadvantage?

Answer 17

A persistence deficit in the current account leads to a surplus on the financial account, changing the pattern of ownership of UK assets. This acts as a further drag on growth

Question 18

What are 2 good things about the financial account?

Answer 18

1) sustainable?
2) FDI

Question 19

How is the financial account sustainable?

Answer 19

A surplus in the financial account is sustainable of the increase in asset value of UK firms is greater than the sales of UK firms to foreigners

Question 20

How is FDI advantageous to the financial account and current account?

Answer 20

Interest rates may need to be high to attract enough FDI for the financial account to sustain a current account surplus

Question 21

Judgements: what do the balance of payments reflect?

Answer 21

They mostly reflect a country’s international competitiveness. If a country loses international competitiveness, then net exports are likely to fall, so reducing aggregate demand and potentially resulting in an increase in unemployment - impacting other government objectives