2.1.4: Balance of Payments

Question 1

What is the balance of payments?

Answer 1

A record of all the transactions between a country and the rest of the world

Question 2

What are the components of the balance of payment?

Answer 2

• The current account
• The capital account
• The financial account.

Question 3

What is the current account?

Answer 3

• A record of a country’s imports and exports, foreign investment and transfers such as foreign aid

Question 4

How is the current account spilt?

Answer 4

• Between the trade in goods and the trade in services
• Also includes investment income and transfers

Question 5

What is the trade in goods?

Answer 5

• Known as visibles
• Traded goods either raw materials and finished goods

Question 6

How do we get the balance of trade?

Answer 6

• It is the difference between visible exports and visible imports

Question 7

What is the trade in services?

Answer 7

• Known as invisibles
• These are services traded in or out of the country.

Question 8

What is a current account deficit?

Answer 8

Where imports are greater than exports
- making the current balance is negative

Question 9

What is a current account surplus?

Answer 9

Where exports are greater than imports, so the current balance is positive

Question 10

How do we get the current balance?

Answer 10

Balance of Trade + Balance of Invisibles + Net income and current transfers.

Question 11

How does high inflation cause an imbalance in the current account?

Answer 11

It causes menu costs for businesses and firms to be higher, which means they will produce less, reducing competitiveness and exporting

Question 12

How do changes in the exchange rate cause an imbalance in the current account?

Answer 12

Affect how much we export
- A stronger domestic currency hampers exports and makes imports cheaper
- But a weaker domestic currency stimulates exports and makes imports more expensive.

Question 13

What are some of the relationships between current account imbalances and economic objectives?

Answer 13

1. More exports, leads to greater inflow, which leads to an increase in AD, leading to ECONOMIC GROWTH
2. Expensive imports of raw materials could lead to cost push inflation in the UK since firms face higher production costs.

Question 14

What is the main difference between the Balance of Payments and the Uk Budget?

Answer 14

• Balance of Payments can run a deficit for ages
• Whereas with the budget, the number must always balance ( it is funded by tax payers)

Question 15

What is the financial account?

Answer 15

• The financial account is a component of the balance of payments that measures capital flows

Question 16

What are some benefits of a trade surplus?

Answer 16

• Economic Growth increase causing employment and standards of living to increase
• Political Authority as for countries to be in a trade surplus, they are mass exporters to the rest of the world.
• The currency strengthens as there is a high demand for their currency ( as there is high demand for their exports).