4.1.7 Balance of Payments

Question 1

What are the three components of the balance of payments?

Answer 1

• Current Account
• Financial account
• Capital Account

Question 2

What is the current account?

Answer 2

• Measures the inflow and outflow of goods, services, investment incomes and transfer payments.

Question 3

What are the main sections of the current account?

Answer 3

• Trade in goods
• Trade in services
• Investment incomes
• Net transfers

Question 4

What the surplus/deficit positions of these sections?

Answer 4

• A deficit on the current account means that the value of imports is greater than the value of exports.
• A surplus on the current account means that the value of imports is less than the value of exports.

Question 5

What are some factors which might cause imbalances on the current account?

Answer 5

• Economic growth
• Higher inflation
• Borrowing money

Question 6

How might government try to reduce a current account imbalances?

Answer 6

• Devaluation of exchange rate
  -(make exports cheaper – imports more expensive)
• ## Reduce domestic consumption and spending on imports

Question 7

What is the capital account?

Answer 7

• Primarily records international flows of capital
  
  • • Inter-country loans
  • -government investments overseas

Question 8

What is the financial account?

Answer 8

• Primarily records net Foreign Direct Investment (FDI)
• Also includes government owned assets:
  - gold
  - currency reserves
  - private assets held abroad

Question 9

What are the four elements of the financial account?

Answer 9

• direct investment
• portfolio investment
• other investment
• reserve assets

Question 10

What is foreign direct investment (FDI)?

Answer 10

• The net transfer of funds to purchase and acquire physical capital
• such as:
• factories and machines
  e. g.
  
  • Nissan, a Japanese firm, building a car factory in the UK

Question 11

Why is FDI important?

Answer 11

• Important source of private external finance for developing countries