2.1.4-Balance Of Payments

Question 1

What is balance of payments?

Answer 1

A record of all financial dealings over a period of time between economic agents of one country and all other countries

Question 2

What is balance of payments made up of?

Answer 2

-current account
-capital account
-financial account

Question 3

What is the current account?

Answer 3

Measures the flow of goods and services

Question 4

What is the current account made up of?

Answer 4

A sum of trade in goods (visible exports - visible imports), trade in services (invisible exports - invisible imports), and net primary income ( PI from abroad - PI to abroad)

Question 5

How do you work out balance of trade?

Answer 5

Trade in goods+ trade in services

Question 6

What is primary income flows?

Answer 6

Measures the flow of factor payments

Question 7

What are the factor payments?

Answer 7

Labour- wages
Land- rent
Capital- interest
Enterprise- profit

Question 8

What is a current account surplus?

Answer 8

There is a net inflow of money into the circular flow of income

Question 9

What is a current account deficit?

Answer 9

There are greater imports than exports

Question 10

What does high economic growth mean for the current account?

Answer 10

It becomes a deficit as there is increased demand for imports

Question 11

What growth would cause a current account surplus?

Answer 11

Export led growth

Question 12

What negative consequence would export led growth lead to?

Answer 12

Inflation

Question 13

What should the sum of all countries trade balance be?

Answer 13

Zero

Question 14

Why has the world economy become more interconnected?

Answer 14

-proportion of output that is traded internationally
-people own assets in other countries
-increasing migration
-more technology being shared

Question 15

Why does a change in the economic conditions of one country affect another?

Answer 15

The quantity they export or import will change

Question 16

What are the problems of having a large CAcD?

Answer 16

-employment decreases
-decreased growth
-inflation increases
-less competitive goods + services
-sterling will depreciate

Question 17

Why will the sterling depreciate?

Answer 17

Due to increased supply of sterling as more demand to exchange the sterling, and less demand for sterling from other countries

Question 18

How does the sterling depreciating lead to the CAcD fixing itself?

Answer 18

Lead to exports increasing, so CAcD reduces

Question 19

Is there much evidence for the CAcD fixing itself?

Answer 19

No, the UK has had the second largest CAcD for 40 years

Question 20

Why is having a large CAcD not a problem?

Answer 20

-deficit may only be a small percentage of GDP
-deficit may only last a short time
-deficit will be followed by a surplus, solves problems
-deficit may have been created to import raw materials or capital goods

Question 21

What are the benefits of a large CAcS ?

Answer 21

-savings increase as more injections
-FDI increases as UK needs more factors of production
-growth increases as more money coming into the UK economy
-increased standard of living due to increased employment
-more power and influence

Question 22

What are the problems of a large CAcS?

Answer 22

-deteriorating international relations
-natural resources decreasing
-externalities
-currency appreciation