4.1.7 - Balance of payments

Question 1

What’s the current account?

Answer 1

The current account records payments for trade in goods and services plus net flows of primary and secondary income.

Question 2

What is a current account deficit?

Answer 2

This is when outflows are higher than inflows.

Question 3

Name 2 ways to fix a current account deficit

Answer 3

• Protectionism
• Export more than you import

Question 4

How do you get a current account surplus?

Answer 4

When inflows are higher than outflows.

Question 5

What’s a fiscal policy?

Answer 5

This policy determines whether or government will spend more than it earns (through tax)

Question 6

What’s a monetary policy?

Answer 6

This control the amount of money available in the economy.

Question 7

Name 2 reasons to have a current account deficit

Answer 7

• High imports due to high income
• Import prices are too low
• Currency can be too strong
• Increase productive capacity to decrease cost-push inflation

Question 8

What does the Marshall-learner condition and the j curve effect suggest?

Answer 8

Currency depreciation will only correct a current account deficit if the product is elastic.

Question 9

What’s the formula that accentuates the Marshall-learner condition and the j curve effect

Answer 9

PedX + PedM > 1

Price elasticity of exports + Price elasticity of imports > 1