2.1.4 - Balance of payment

Question 1

What is the balance of payments?

Answer 1

A record of a country’s trade or transactions with the rest of the wrold

Question 2

What is trade surplus (balance of payments) ?

Answer 2

Trade surplus is when the sum of exports of goods and services, investment income and transfers is greater than imports.

Question 3

What is trade deficit (balance of payments ?)

Answer 3

Trade deficit is when the sum of exports of goods and services, investment income and transfers is lower than imports.

Question 4

Which 3 countries are most popular for trade surplus?

Answer 4

China, Norway and Saudi Arabia

Question 5

What 3 countries are most popular for trade deficit?

Answer 5

United States. United Kingdom and India

Question 6

Name 3 reasons why the UK has trade deficit?

Answer 6

• Due to an increase in consumer demand for goods which are imported
• A decline in the manufacturing sector (deindustrialization)
• Lower production of primary materials such as oil and gas so there’s a demand for exports

Question 7

Name 2 reasons why the UK has a large surplus on the trade in services component of the current account?

Answer 7

• Deindustrialization + Specialisation in other sectors

- London being a tourist attraction and a financial center

Question 8

What is investment income?

Answer 8

This is the profits and dividends that are received are sent back to the UK, and count as a credit of investment income on the current account.

Question 9

What are transfers?

Answer 9

Transfers are payments made (or received), usually by the government. to or from other countries.

Examples

• Membership payment for EU
• Foreign Aid

Question 10

Name 2 reasons why there is a persistent deficit on the current account?

Answer 10

• As consumer spending increases, so does our demand for goods. In the UK we have a high proensity to consume imported goods, thus improvements in economic growth and consumer spending feeds through to an increased and persistent deficit
• De-industrialisation has occurred so this means that UK firms can’t do sweatshop movements so we rely on imported goods.
• It is argued that our exchange rate is too strong (SPICED and WPIDEC).
• The deficit is a sign of an unbalanced economy. De-industrialisation (just the sector effect`)

Question 11

What 2 things can be done in order to redress the balance and explain them.

Answer 11

• Controlling the consumer spending will reduce the demand for imports. Whilst this may improve the balance of payments consideration should be given to other parts of the economy.
• Investing in the supply-side of the economy should improve productivity of UK firms in terms of quality and price competitiveness. Enhanced productivity measures may give rise to higher exports through greater output.
• Depreciation of the exchange rate may make UK exports more competitive (SPICED and WPIDEC). However, this will increase the relative price of imports and this will lead to be problematic if we can’t produce alternatives domestically
• Improve overall macroeconomic conditions in the UK. This will encourage investment and domestic growth as well as reducing the reliance of goods and services from other countries.

Page 261 in the booklet

Question 12

Name 2 examples of countries which have an imbalance on their current account.

Answer 12

China and Saudi Arabia

Question 13

Name 2 ways and explain how a balance of payments surplus can be reduced.

Answer 13

• Encouraging free trade - If import constraints are removed such as tariffs and then this may boost the demand for imports are they may be more available so more people may purchase them
• Appreciation/revaluation of currency - If the currency is allowed to rise of revalued upwards then this will make exports less price competitive and imports more attractive (cheaper)
• If domestic demand is weak, then policies to encourage spending such as lower interest rates will increase the demand for imports

Question 14

What is interconnectedness?

Answer 14

The state of economies being connected to each other.

Question 15

What is expenditure reducing?

Answer 15

This is the policy of lowering the amount of funds spent. These can be fiscal or monetary, which aim to the level of consumption and consequently reduce aggregate demand. This could be done through raising taxes to reduce disposable income and therefore reduce the demand for imports.

Question 16

What is expenditure switching?

Answer 16

This consists of policies which aim to encourage consumers to switch their demand away from imports towards domestically made goods and services. This can be done if country is able to increase the relative price of imports for example through tariffs. On the other hand, if a country is able to make its own output and exports more attractive (cheaper) this can be done through subsidies to domestic firms and cut production costs, general investment in the supply-side of the economy or the depreciation-devaluation of the exchange rate.

Question 17

What are tariffs?

Answer 17

A tax on imported products which may be ad valorem (%) or specific tax (a set amount per unit imported)

Question 18

What is prodcutivity?

Answer 18

Output per unit of input.

Question 19

What is inflation?

Answer 19

A sustained increase of the general price level for goods and services.

Question 20

What does SPICED stand for?

Answer 20

Strong
Pound
Imports
Cheaper
Exports
Dearer

Question 21

What does WPIDEC stand for?

Answer 21

Weak
Pound
Imports
Dearer
Exports
Cheaper

Question 22

What does ceteris paribus mean?

Answer 22

“All other things being equal”