2.1 - Balance of payments

Question 1

Components of the Balance of Payments:

Answer 1

The balance of payments (BoP) is a record of all economic transactions between a country and the rest of the world. It is divided into two main components: the current account and the capital and financial account.

Question 2

Current Account shows

Answer 2

a) the value of imports and exports of goods and services
b) net income payments received from/paid to abroad
c) government transfers (international aid or money )

Question 3

Which country consistently runs a trade surplus due to its strong manufacturing sector, exporting products worldwide?

Answer 3

China

Question 4

Financial account

Answer 4

includes any trade of foreign exchange reserves as well as buying and selling of assets held in different countries

Question 5

Balance of trade

Answer 5

the value of exports minus the value of imports of physical goods as well as invisible services

Question 6

Current Account Deficit

Answer 6

occurs when a country’s imports of goods, services, income, and transfers exceed its exports in those categories. It implies that the country is spending more than it is earning from the rest of the world.

Question 7

Current account surplus

Answer 7

occurs when a country’s exports of goods, services, income, and transfers exceed its imports. It implies that the country is earning more than it is spending internationally.

Question 8

Relationship between Current Account Imbalances and exchange rates

Answer 8

A persistent current account deficit may lead to a depreciation of the country’s currency, making exports more competitive and imports more expensive. This can help correct the deficit.

Question 9

Relationship between Current Account Imbalances and economic growth

Answer 9

• High economic growth tends to mean that the current account becomes a deficit as there is increased imports due to increased demand, and it is during times of high
  unemployment etc. that the current account deficit tends to improve.
• Governments tend to want export led growth , which would cause economic growth,
  high employment and improve the current account balance; although it could lead to inflation

Question 10

Relationship between Current Account Imbalances and Employment

Answer 10

A trade surplus may support job creation in export-oriented industries, while a deficit can lead to job losses in import-competing sectors

Question 11

Relationship between Current Account Imbalances and inflation

Answer 11

A depreciating currency (due to a deficit) can lead to imported inflation, affecting the domestic price level.

Question 12

Interconnectedness of Economies through International Trade:

Answer 12

• International trade fosters economic interdependence among countries. One country’s economic policies and developments can have ripple effects globally.

Question 13

Interconnectedness of Economies through International Trade: examples

Answer 13

Example: The 2008 financial crisis in the United States had global repercussions, as it led to reduced demand for imports from other countries, affecting their economic growth.

Supply chain integration: Many products involve components from multiple countries. Disruptions in one country can disrupt global supply chains.
Example: The COVID-19 pandemic disrupted supply chains worldwide, affecting industries from electronics to pharmaceuticals.

Benefits of trade: International trade allows countries to specialize in producing what they are most efficient at, leading to efficiency gains and a higher standard of living.
Example: Switzerland specializes in the production of high-quality watches, benefiting from a strong reputation in the global market.