2.1.4/4.1.7 Balance of payments

Question 1

What does the balance of payments show?

Answer 1

The BoP records all financial transactions (inflows/outflows) made between consumers/firms/the govt. in one country with other countries

Question 2

What is a trade deficit?

Answer 2

When the value of a country’s imports is higher than the value of the country’s exports (M>X)

Question 3

What is a trade surplus?

Answer 3

When the value of a country’s exports is higher than the value of a country’s imports (X>M)

Question 4

What does the current account show?

Answer 4

The current account measures the total value of exports minus the total value of imports, and the flows of income from trade

Question 5

Trade in goods (CA)

Answer 5

Visible trade: the value of exported and imported goods (e.g. cars/computer/food)

Balance: exports - imports

Question 6

Trade in services (CA)

Answer 6

Invisible trade: the value of exported and imported services (e.g. tourism/insurance/transport)

Balance: exports - imports

Question 7

Primary income (CA)

Answer 7

Flows of money in and out of the country resulting from employment or earlier investment (e.g. interest/profits/dividends/salaries)

Net: in - out

Question 8

Secondary income (CA)

Answer 8

Transfers of money from an individual/government to another (e.g. annual contributions/military aid/overseas development/financial aid to family members)

Net: in - out

Question 9

Current account balance

Answer 9

The value of inflows minus the value of outflows in an economy

Question 10

Current account deficit

Answer 10

When the value of outflows of an economy exceeds the value of inflows

Question 11

Current account surplus

Answer 11

When the value of inflows into an economy exceeds the value of outflows

Question 12

Causes of a current account deficit

Answer 12

• increased ec. growth: leading to an increase in imports
• countries being unable to compete internationally
• a rise in the value of currency: making exports more expensive and imports cheaper
• rise in inflation: exports become more expensive and less competitive
• rise in world prices for imported raw materials: PED is relatively price inelastic

Question 13

Causes of a current account surplus

Answer 13

• high interest rates: encouraging saving (less consumption)
• a fall in the value of currency: making exports cheaper and imports more expensive
• increase in the quality of exports