4.1.7 Balance Of Payments

Question 1

What are the components of the balance of payments

Answer 1

• current account
• capital account
• the financial account

Question 2

What is the current account?

Answer 2

• marks inflow and outflow of goods and services into a country
• net primary income and net secondary income
• eg: raw materials, manufactured goods
• there are current account surplus and deficits

Question 3

What is the balance of payments?

Answer 3

Countries measure all of the international monetary transactions within a certain period

Question 4

What is the capital account?

Answer 4

• international capital transfers are recorded
• foreign investment
• non - financial assets
• debt forgiveness/ cancellations
• capital transfers of ownership of fixed assets

Question 5

What is the financial account?

Answer 5

• includes transactions that result in a change of ownership of financial assets and liabilities between uk residents and non - uk residents
• eg: - FDI flows
• portfolio of banking flows ( hot money flows in/out )
• banking flows

Question 6

What is portfolio investment?

Answer 6

• happens when people/ businesses from one country buy shares or other securities such as bonds in other nations

Question 7

What are the causes of a trade deficit on the current account?

Answer 7

• stronger pound = expensive exports = exports being uncompetitive as imports are cheaper
• increase in national income = consumer spending increase = demand increases
• lack of resources
• supply side constraints

Question 8

What are the consequences of a trade deficit on the current account?

Answer 8

• decrease in FDI
• decrease in AD
• currency depreciation
• lack of competitiveness/ supply side weakness

Question 9

What are the causes of a trade surplus on the current account?

Answer 9

• high incomes abroad
• low incomes at home
• weaker exchange rate
• low inflation : export could be more competive
• high productivity
• low minimum wage
• strong investment
• increase in export competitiveness
• gains a comparative advantage
• new resources

Question 10

What are the consequences of a trade surplus on the current account?

Answer 10

• increase in trade balance
• increase in AD
• increase in growth
• decrease in unemployment
• however, could trigger demand pull inflation
• currency appreciation
• financial account deficit : balances the BOP = buy bonds of the countries that are in a current account deficit

Question 11

Evaluation on a current account surplus

Answer 11

• could harm international relations = countries with a trade deficit could retaliate = could trigger a trade war
• perhaps shows a sign of a unbalanced economy = current account surplus could mean that countries would focus o production for those exports rather than domestic production. Therefore not enough consumer spending

Question 12

Evaluation on a current account surplus

Answer 12

• could harm international relations = countries with a trade deficit could retaliate = could trigger a trade war
• perhaps shows a sign of a unbalanced economy = current account