2.1.4 Balance of Payments

Question 1

what is the balance of payments?

Answer 1

• record of payments between one country and the world
• record of all money flowing in and out of the country

Question 2

what are the two accounts within the balnce of payment?

Answer 2

• current account
• capital and finanial account

Question 3

what does the current account consist of?

Answer 3

• trade in goods
• trade in sevices
• invetsment income
• current transfers

Question 4

what is the trade in goods and services?

Answer 4

• imports: coming in from foreign
• exports: going from country (hand made)

Question 5

what does the current account measure?

Answer 5

inflows and outflows of money paid and recieved
* all imports: withdrawal/ leakages (negative entry)
* out exports : injection (positive entry)

Question 6

what is investment income?

Answer 6

• rent/profit made on an investment abroad
  the income that you get from an investment, it will appear as a positive transaction, increasing the current account

investment in properties, companies

Question 7

what happens if investment income is paid/ recived from foreign countries?

Answer 7

• paid: negative (decreases current account)
• recieved: postitve (increases current account)

Question 8

what are current transfers?

Answer 8

when money is sent abroad without anything (goods/ services) in return

eg: remittance, foreign aid

Question 9

what is remittance?

Answer 9

relatives working abroad transfering money back home to families

Question 10

what is a current account deficit, surplus and equalibrium?

Answer 10

• deficit: negative current account, more money leaving than entering
• surplus: positive
• equalibrium: zero

Question 11

Describe the finaical and capital account

Answer 11

• balances the current account to equal 0
• money invested by banks back into UK as investment

Question 12

what are the long term consequences to the economy of a capital and finacial account surplus?

Answer 12

• foreign investors buying UK assets/ shares
• future profits of firms will not go to UK but to foreign investors
• hurting economy in the long run
• aim to have current account equailibrium (capital and finanical account to be zero)

future earnings leaking out of the economy

Question 13

what are the two methods to work out the GDP of an economy?

Answer 13

• expenditure method
• incnome method

Question 14

define balance of payments

Answer 14

a record of all financial transactions between an economy and the rest of the world

Question 15

define current account

Answer 15

a record of payment for the purchase and sale of goods/services as well as income and transfers

Question 16

define current account deficits

Answer 16

when net external trade and income is negative leading to a net outflow of demand from the circular flow

Question 17

define current account surplus

Answer 17

when the net external trade and income is positive leading to net injection into the circular flow

Question 18

why might there be a trade deficit?

Answer 18

• increase in incomes, high MPM / imports are normal goods so demand increases
• low producitivty: higher cost per unit, exports are more expensive, less demand for domestic goods
• increase in value of the pound
• worsening of UK exports quality