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Macroeconomics (2) > 4.1 Balance of Payments > Flashcards

4.1 Balance of Payments Flashcards

1
Q

What is the balance of payments?

A

A set of accounts recording all transactions conducted between residents of a nation and non-residents during a period

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2
Q

What is the current account?

A

A record of the value of the net flow of goods/services and income (primary and secondary)

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3
Q

What are the 3 components to a balance of payments?

A
  • Current account
  • Capital account
  • Financial account
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4
Q

What is the financial account?

A

Transactions that result in a change of ownership of financial assets/liabilities between a country’s residents and non-residents

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5
Q

What is a current account deficit?

A

When the total value of goods/services a country imports exceeds the total value it exports

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6
Q

What is a current account surplus?

A

When an economy is exporting a greater value of goods and services than it is importing

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7
Q

What are the 3 short-term causes of a current account deficit?

A

- High levels of consumer demand/income (meet this demand by importing)
- Strong exchange rate (reduces the price of imports, increases the price of exports)
- High inflation (increases the price of exports for other countries)

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8
Q

What are the 3 transactions involved in a balance of payments?

A
  • Trade flows
  • Investment incomes
  • Other financial transactions
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9
Q

How are the current account and financial account interdependent?

A

A deficit on the current account must be matched by a financial account surplus (a country needs foreign exchange reserves, represented by an inflow of foreign money)

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10
Q

Why must a current account surplus be matched by a financial account deficit?

A

When a country exports more, it earns more foreign exchange from exports than is used for imports (accumulating foreign exchange reserves)

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11
Q

What are 2 examples of primary income?

A
  • Income on investments (direct + portfolio)
  • Taxes on income/wealth
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12
Q

What are 2 examples of secondary income?

A
  • Remittances
  • Foreign aid
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13
Q

What are the 3 causes of a current account surplus?

A

- Low exchange rate (increases the price of imports, decreases the price of exports)
- Low imports/high savings rate (less domestic spending)
- Low investment (lack of investment opportunities)

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14
Q

What are 2 disadvantages of a current account deficit?

A
  • Unemployment (domestic job losses as fewer goods produced)
  • Poor economic growth (uncompetitive, overreliance on foreign imports, low AD)
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15
Q

What is an advantage of a current account deficit?

A
  • Higher levels of domestic consumption (can improve standard of living/inequality)
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16
Q

What are the 4 components of a current account?

A
  • Net balance of trade in goods
  • Net balance of trade in services
  • Net primary income
  • Net secondary income
17
Q

What are the 3 components of a financial account?

A
  • Net balance of FDI
  • Net balance of portfolio investment (flows of debt/equity)
  • Balance of banking flows
18
Q

What are 3 long-term causes of a current account deficit?

A

- Deindustrilisation (decrease in manufacturing means it is difficult to export)
- Lack of capital investment (domestic firms have lower productivity)
- Natural resources (countries with natural resources tend to export more)

19
Q

Evaluation for a current account deficit

A
  • May occur due to high growth/strong consumer spending, rather than uncompetitiveness
  • Deficit financed by long-term capital investment may be more sustainable than by borrowing
20
Q

What are the 3 policies used to reduce imbalances in the balance of payments?

A
  • Expenditure switching policies
  • Expenditure reducing policies
  • Supply-side policies
21
Q

What is the difference between an expenditure switching and reducing policy?

A

- Expenditure switching policy: aims to switch consumer spending towards domestic goods, away from imports
- Expenditure reducing policy: aims to reduce consumer demand in an economy

22
Q

What are 2 examples of expenditure switching policies?

A
  • Depreciation/devaluation
  • Protectionism (tariffs/quotas)
23
Q

What are 2 examples of expenditure reducing policies to correct a CA deficit?

A
  • Contractionary fiscal policy
  • Contractionary monetary policy
24
Q

What are 3 examples of supply-side policies to correct a CA deficit?

A
  • Deregulation
  • Cutting business taxes
  • Investment in education/training (interventionist)
25
Q

How does a depreciation help to correct a current account deficit to correct a CA deficit?

A
  • Government may allow the currency to depreciate
  • This encourages exports (which become cheaper)
  • This discourages imports (which become expensive)
  • However can result in higher domestic inflation
26
Q
A

Macroeconomics (2) (6 decks)

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