4.1.7 - Balance of payments

Question 1

What is the balance of payments ?

Answer 1

A record of all facial transactions between one country and the rest of the world

Question 2

Components of the balance of payments

Answer 2

1. Current account
2. Capital and financial account

Question 3

What makes up the current account ?

Answer 3

Question 4

What makes up financial account

Answer 4

Question 5

Factors affecting the current account

Answer 5

• Exchange rate
• Relative inflation
• Productivity and costs
• Quality
• Growth

Question 6

How does exchange rate affect current account ?

Answer 6

• When the pound appreciates, import expenditure will increase and export revenue will decrease . This will decrease or worsen the UK current account.
  Import expenditure increases because the stronger pound makes them cheaper for UK consumers, increasing their demand. This means that more money is leaving the UK economy.
  Export revenue decreases because the stronger pound makes them more expensive for foreign consumers, decreasing their demand. This means that less money is entering the UK economy.
• When the pound depreciates (gets weaker), imports get more expensive and exports get cheaper.
  With more expensive imports, UK consumers will buy less, which will decrease import expenditure. There will be less money leaving the UK economy.
  With cheaper exports, foreign consumers will buy more, which will increase export revenue. There will be more money entering the UK economy.
  Outflows are decreasing and inflows are increasing, so the current account is increasing or improving

Question 7

How does productivity and cost affect current account ?

Answer 7

Question 8

How does quality current account ?

Answer 8

Higher quality makes exports more internationally competitive. This will help increase export revenue helping to run a current account surplus.

E.g October 2024 Germany ran a current account surplus of 12.6bn USD. This may be due to their high quality vehicles which makes their vehicles more internationally competitive.

Vice versa for Lower quality goods and services

Question 9

How does economic growth affect the current account

Answer 9

Question 10

What are trade imbalances ?

Answer 10

Question 11

• Significance of trade imbalances for countries running a deficit.

Answer 11

Question 12

• Significance of trade imbalances for countries running a surplus.

Answer 12

Economic Stability: Persistent imbalances can lead to financial instability, as countries may accumulate unsustainable levels of debt.