2.5 Balance of payments

Question 1

What is the balance of payments?

Answer 1

The total net income of a economy within a set period. Essentially a record of all money going in and out of a economy within a given period.

Question 2

What is the current account?

Answer 2

An economic account which contains all current assets within an economy (assets which can readily be liquidated)

Question 3

What is the capital account?

Answer 3

An economic account which contains all long term assets within the economy such as the factors of production and other economic assets.

Question 4

What is the financial account?

Answer 4

An economic account which contains all foreign investments.

Question 5

What is primary income?

Answer 5

Primary income is all the income produced by workers participating in production.

Question 6

What is secondary income?

Answer 6

Secondary income is all the income produced by countries giving income to another for free. Essentially it is ‘something received for nothing.’ such as foreign aid.

Question 7

What can cause a current account deficit?

Answer 7

1. High inflation
2. Low output per worker due to lack of innovation
   3.Appriciation in exchange rate
3. Consumers margin propensity to import to increase

Question 8

What are the effects of a current account deficit?

Answer 8

1. Low GDP growth as high leakages
2. Lower employment leading to lower investment
3. Depreciating exchange rate
4. Sale of nations assets to foreign buyers boosting prices.
   5.Weakness in supply side

Question 9

What are solutions to a current account deficit?

Answer 9

• Changes in fiscal policy and monetary policy including increasing interest rates, changing exchange rates or increasing tax’s
• Government can also intervene and introduce tariffs on imports to increase their overall prices. However this may cause a retaliation.