2.1.4 Balance of Payments

Question 1

define the balance of payments

Answer 1

a record of a country’s transactions with the rest of the world - a record of all the money coming into and going out of a country, including payments for goods, services and financial transactions

Question 2

what are the three sections of the balance of payments

Answer 2

current account, financial account and capital account

Question 3

why is the current account the main focus for most governments

Answer 3

it gives them an indication of the competitiveness of their economy in the global market place

Question 4

what must the balance of payments ultimately equal

Answer 4

0

Question 5

define imports

Answer 5

goods and services bought from foreign countries - negative on the BoP because they are an outflow of money
subtracted from real GDP

Question 6

define exports

Answer 6

goods and services sold to foreign countries - positive on the balance of payments because they are an inflow of money
added to real GDP

Question 7

define the current account

Answer 7

records payments for trade in goods and services plus net flows of primary and secondary income

Question 8

does the UK run a deficit or surplus on the trade in goods

Answer 8

large deficit

Question 8

why has the UK traditionally run a large deficit on the trade in goods

Answer 8

increased demand for consumer goods - many of which have to be imported (ie food, gas)
decline in the UK manufacturing sector due to low wage economies such as China

Question 8

what are the four balances on the current account

Answer 8

net balance of trade in goods
net balance of trade in services
net primary income
net secondary income

Question 9

what goods is the UK a major exporter of

Answer 9

pharmaceuticals/cars

Question 9

does the UK run a deficit or surplus on the trade in services and why

Answer 9

surplus due to UK being a major exporter in financial and business services

Question 10

which service is the UK a major importer of

Answer 10

foreign holidays

Question 11

why has the UK run a surplus on trade in services

Answer 11

UK economy has shifted away from primary and secondary sectors towards tertiary sector employment, thus specialising in the provision of services
specialisation has meant UK is more competitive in the provision of the services and can offer better services at lower cost
London has developed as one of the world’s prime financial centres

Question 12

define a trade surplus

Answer 12

when the sum of exports of goods and services is greater than imports

Question 13

define a trade deficit

Answer 13

when the sum of exports of goods and services is less than imports

Question 14

define primary/investment income

Answer 14

investment income is generated by UK owned overseas assets - the reward for investments in other countries
the profits and dividends that are received are sent back to the UK

Question 15

is primary income usually positive or negative in the UK

Answer 15

positive

Question 16

define secondary income/transfer payments

Answer 16

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

Question 17

is secondary income usually positive or negative in the UK

Answer 17

given its status in the European and global economy, the UK typically runs a deficit

Question 18

give and explain 3 examples of money flows which appear as secondary income

Answer 18

remittances - money sent home by foreign workers
foreign aid - grants, loans, and other forms of assistance provided by one country to another for developmental, humanitarian or other purposes
payments made to international institutions - e.g when UK was in the EU it was a net contributor to the EU budget

Question 19

briefly explain the role of the capital and financial account

Answer 19

offset deficits on the current account

Question 20

define a current account surplus

Answer 20

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

Question 21

define current account deficit

Answer 21

when the sum of exports of goods, services, investment income and transfers is less than imports

Question 22

what is the capital account

Answer 22

puts together the current account and financial account in balance by recording changes in net assets, as well as errors and omissions

Question 23

what is the financial account

Answer 23

records money flows for investment purposes