2.1.4 Balance of Payments

Question 1

What is the balance of payments (BoP)

Answer 1

Records all financial transactions made between consumers, businesses and Governemnt in one contry with other nations

Question 2

What is trade

Answer 2

Trade involves the buying and selling goods and
services with other countries

Question 3

What are exports

Answer 3

The sale of goods and services to buyers in other countries leading to an inflow of currency to the UK

Question 4

What are imports

Answer 4

The purchase of goods and services from abroad that leads to an outflow of currency from the UK

Question 5

Why does the UK export goods and services?

Answer 5

To find a market for excess production that cant be sold at home

To sell products at higher prices

Question 6

Why does the UK import goods and services?

Answer 6

Goods that are not available in the domestic market

Goods that are less expensive or better quality from abroad

Wider range of products

Question 7

What impact do exports have on the UK economy?

Answer 7

Exports create income for UK firms and employment opportunities

Exports add to the circular flow of income

Question 8

What impact do imports have on the UK economy?

Answer 8

Allows consumers to buy cheaper products

Allows firms to accquire raw products/commodities for production

Question 9

What are positive entry classes as

Answer 9

Inflows of foregin currency

exports sold overseas cause money to come into a country

Question 10

What is negative entry classed as

Answer 10

Outflows of foregin currency

Imported good/serivces cause money to leave the circular flow of income and spending

Question 11

What are the three main account on the BoP

Answer 11

• Current account
• Capital account
• Financial account

Question 12

What is the main measure of a contry’s external trade performance

Answer 12

Current account (of the BoP)

Question 13

What does the current account menasure

Answer 13

the difference between money and credit going in and out of an economy

through exports, imports and imcome paid on assets both home and abroad

Question 14

What is a current account deficit

Answer 14

means that more moeny is leaving than entering the country

There is a net outflow of income from the economy’s circular flow

Current account deficit nations are debtor countires

Question 15

What is a current account surplus

Answer 15

means more money is entering the country than leaving

Current account surplus nations are creditor nations

Question 16

What was the current account (BoP) for the UK in 2018

Answer 16

£-81644 million

Question 17

Is the current account (BoP) just trade

Answer 17

No

it includes aspects like:

Net primary income and Net secondary income

Question 18

The current account deficit was x% of GDP in 2018 compared to 3.3% in 2017

Answer 18

3.9%

Question 19

What is included in the trade balance in goods

Answer 19

• Manufactured goods, components, raw materials, energy such as oil and gas
• Capital technology

Question 20

What is included in the trade balance in service

Answer 20

• Banking, insurance, Consulatancy
• Tourism, Transport, Logistics
• Shipping, Education, Health, Research, Cultural Arts

This is usually a positive in the UK

Question 21

What is included in Net Primary Income from Overseas Assets

Answer 21

• Flow of profits, intrests and dividends from investments in other contires
• Net remittance flows from migrant workers

Question 22

What is included in Net Secondary Income

Answer 22

• Oversea aid/debt releif
• UK payment to the EU

Question 23

True or False?

Overall the Uk imports a greater Value than it exports, meaning it runs a trade deficit

Answer 23

True

Question 24

Negatives for a current account deficit

Answer 24

1. Loss of aggregate demand which the causes a slower rate of real GDP growth and therefore reducing livng standards
2. Loss of jobs in home-bases industires, may lead to a regional decline and strucutral unemployemt
3. Can lead to a currency weakening (less demand for currency) and high inflations, so countries may run short of vital currency reserves
4. Trade deficit might actually reflect lack of competitivness/ supply-side weaknesses

Question 25

Causes of a current account deficit

Answer 25

1. Poor price and non-price competitivness
2. Strong exchage rate affecting exports and imports
3. Recession in one or more major trade partner countires
4. Volatile global prices
5. Booming domestic economy
6. Falling oil price reducing cost of imports
7. Relatively high inflation in UK makes exports less competitive
8. Redction in quality of UK exports decreases demand for them

Question 26

Why would poor price and non-price competitvness lead to current account deficit

Answer 26

• Higher relative inflation than a trading partner
• Low levels of capital investment and research and development spending
• Weaknesses in design, branding, performance and low labour productivity

Question 27

Why would strong exchange rate affecting exports and imports lead to current account deficit

Answer 27

• High currency value increases the price of exports, perhaps causing falling sales
• Appreciating currency also makes imports cheaper, substitute for home output (Thatchers closing of heavy industries)

Question 28

Why would Recession in one ore more major trade partner countries lead to current account deficit

Answer 28

• Recession cuts the value of exported goods/services to these countries
• Businesses may find barriers to switching towards faster-growth nations

Question 29

Why would Volatile global prices lead to current account deficit

Answer 29

• Exporters of primary commodities might be hit by a fall in global prices
• Commodity-importing nations could be hit by higher world prices for oil and gas

(commodity= raw material/primary agricultural product)

Question 30

Why would a booming domestic economy lead to current account deficit

Answer 30

• Domestic producers need to import more material from abroad
• Households, especially with a high tnedancy to import, buying more imports due to having a higher imcome

Question 31

Around x% of all output produced globally is exported

And China, US, Germany, France and Japan account for just under y% of all national trade

Answer 31

x= 25%

y = 40%