2.5 Balance of payments

Question 1

Define balance of payments

Answer 1

A set of accounts showing the difference in money entering and exiting the economy

Question 2

Components of the current account (measuring trade)

Answer 2

Trade in goods, trade in services, Income, transfers

Question 3

Policy objective of balance of payments

Answer 3

Aiming for low deficit, because if deficit is high, inflation, low export competitiveness

Question 4

What is balance of payments imbalance

Answer 4

where there’s a deficit or surplus

Question 5

Causes of BofP imbalances

Answer 5

Currency appreciation, Economic growth, country becomes more competitive, deindustrialization, membership of a trade union,

Question 6

Consequences of BofP imbalance

Answer 6

Cost-push inflation, Surplus or deficit can reflect an unbalanced economy and indicate over-reliance on other nations