4.1.7: Balance Of Payments

Question 1

What is balance of payments (BOP)?

Answer 1

A record of all transactions made between economic agents of one country and the rest of the world.

Question 2

What are the components of the balance of payments?

Answer 2

-Current Account (2.1.4).
-Capital Account.
-Financial Account.

Question 3

What is the current account split into?

Answer 3

-Trade in goods.
-Trade in services.
-Investment income.
-Current transfers.

Question 4

What is the capital account split into?

Answer 4

RELATIVELY UNIMPORTANT
Records UK international money transfers of immigrants & emigrants.

Question 5

What is the financial account split into?

Answer 5

-Foreign Direct Investment (FDI).
-Portfolio Investments.
-Other Investments.

Question 6

What is foreign direct investment (FDI)?

Answer 6

The purchasing of part of a foreign firm (e.g. BT buying a 15% share in a Brazilian telecommunications company).

Question 7

What is portfolio investment?

Answer 7

The purchasing of securities (such as bonds or shares) in other nations.

Question 8

What is other investment?

Answer 8

Loans, purchasing of currency & bank deposits.

Question 9

What are causes of a trade current account surplus?

Answer 9

-High productivity.
-Low inflation rate.
-Undervalued exchange rate.
-Possession of natural resources.
-Relocation of manufacturing to low wage countries.
-Protectionist policies.

Question 10

What policies are used to reduce a trade current account deficit?

Answer 10

-Demand-Side Management.
-Supply-Side Initiatives.
-Protectionist Policies.

Question 11

How does demand-side management reduce the trade current account deficit?

Answer 11

-Monetary & fiscal reduces AD.
-Quantitative easing reduces AD.
-There is high income elasticity for imports.

Question 12

How does supply-side initiatives reduce the trade current account deficit?

Answer 12

-Industrial policy that aims to improve labour or infrastructure.
-Encourage industries to exploit opportunities in export markets abroad.
-Focus resources on industries where the UK has a comparative advantage.

Question 13

How does protectionist policies reduce the trade current account deficit?

Answer 13

-Tariffs or quotes reduce the attractiveness of imports.
-Control inflation so British goods rise in price at a slower rate.

Question 14

Evaluation for demand-side management reducing the trade current account deficit:

Answer 14

-Hyperinflation.
-Short term solutions that limit the economy’s output.
-Reduction in growth and living standards.

Question 15

Evaluation for supply-side initiatives reducing the trade current account deficit:

Answer 15

-Politically unpopular.
-Short term job losses.

Question 16

Evaluation for protectionist reducing the trade current account deficit:

Answer 16

-Trade wars (other countries also impose tariffs or quotas).
-Potential for deflation.

Question 17

What can a trade imbalance suggest for the UK?

Answer 17

An imbalance suggests that the UK is reliant on the performance of other countries.
If export markets, (e.g. EU) become weak, UK economic performance will be affected.
This was seen during the 2008 financial crisis.

Question 18

What can a surplus indicate for a country?

Answer 18

A surplus indicates low consumer spending and a low savings ratio. It also means consumers are enjoying fewer goods than they otherwise could, lowering living standards.

Question 19

Why is a current account deficit a concern for the Eurozone?

Answer 19

The countries have a fixed exchange rate. This means they cannot devalue the currency to restore their level of international competitiveness.