2.1.4 Balance of Payments (BoP)

Question 1

What is the balance of payments

Answer 1

The BoP records all financial transactions between consumers, businesses and government in one country with other nations

Question 2

What are inflows classified as ?

Answer 2

Inflows of foreign currency are classed as positive entry in the balance of payments

Question 3

Give an example of inflows in the BoP

Answer 3

Exports which are sold overseas which causes money to come into the UK

Question 4

What are outflows classified as ?

Answer 4

Outflows of foreign currency are classified as a negative entry of the balance of payments for example imported goods causing money to leave the circular flow of income and spending

Question 5

What is an example of outflows

Answer 5

A UK tourist spending their money overseas

Question 6

What does the Current account measure

Answer 6

• Trades in goods
• Trades in services
• Income
• Transfers

Question 7

What is the trade balance ?

Answer 7

The comparasion of goods and services being exported or imported

Question 8

What is a trade balance surplus

Answer 8

Where there is more goods being exported than exported , therefore more injections into the circular flow of income and higher GDP

Question 9

What is a trade balance deficit

Answer 9

Where there is more goods being importes rather then exports, therefore there is higher leakages of the circular flow of income as imports is a leakage

Question 10

What may be some demand side causes that cause a current account deficit

Answer 10

• Strong domestic growth , this is because of higher consumer confidence and higher disposable incomes, high MPC and therefore sucks in imports.
• Recession overseas, this means incomes are falling overseas therefore lower demand for imports overseas which mean lower exports for UK
• Strong currency , Strong pound leads to cheap imports and expensive exports therefore lower export revenue. This is because other currencies will not be as strong as the pound

Question 11

What may be supply side reasons on why there may be a current account deficit.

Answer 11

• Low investment as firms may not have adequate capital material to produce competitive goods and services, therefore people would rather buy from other countries
• Low productivity , firms may have low output due to low prod and therefore low qual and quant of prods
• Depletion of natural resources therefore firms which rely on NR to produce will no longer be able to produce goods and services to export
• Poor qual and reliability for G and S , therefore export quality will lower and this alos links to competitiveness

Question 12

What are the consequences of a current account deficit

Answer 12

• Lower value of (X-M) will leads to lower level of AD, this leads to lower levels of growth which also
  relates to the MEO of growth.

Question 13

What are some evaluations of current account deficit and why it may not be an indicator of a reduction in AD

Answer 13

• The size of the current account deficit may be small and negligible
• The increase in imports worsening the current account deficit also mean that incomes are rising for consumers as demand for incomes rise.