4.1.7- Balance of Payments

Question 1

What does the current account consist of?

Answer 1

trade in goods+ trade in services+ investment income+ current transfers

Question 2

What does the capital account consist of?

Answer 2

IFA -OFA (foreign aid)

Question 3

What does the financial account consist of?

Answer 3

FDI+ portfolio investment+ HMF+ debt

Question 4

What is portfolio investment?

Answer 4

Having a stake <10% in a company

Question 5

What was UK CAcD in Q3 2024?

Answer 5

£20bn or 2.8% of GDP

Question 6

What was UK total trade deficit in Q3 2024?

Answer 6

£6.8bn

Question 7

What was UK PI deficit in Q3 2023?

Answer 7

£7.1bn

Question 8

What are the short term causes of deficits?

Answer 8

-high levels of consumer demand
-strong exchange rate
-high levels of relative inflation

Question 9

What is an example of a country with high inflation?

Answer 9

Turkey with 47% inflation in 2024

Question 10

What is the medium term cause of deficits?

Answer 10

-comparative advantage

Question 11

Why does comparative advantage cause a deficit?

Answer 11

-If a country loses its CA, people will transfer their purchases to other countries
-growth of cheap imports from countries like China has caused a substitution effect

Question 12

What are the long term causes of a deficit?

Answer 12

-lack of capital investment
-deindustrialisation
-natural resource endowment
-internal competitiveness

Question 13

Why does lack of capital investment cause a deficit?

Answer 13

Lowers productivity

Question 14

What is UK productivity growing by?

Answer 14

1%

Question 15

What is German productivity compared to UK?

Answer 15

Germany has 35% higher productivity per hour than the UK

Question 16

Why does deindustrialisation lead to a deficit?

Answer 16

Decreases the relative importance of industry and manufacturing so its harder to export as services are more difficult to export

Question 17

What is natural resource endowment?

Answer 17

Some countries have a surplus of commodities in their country so can sell extra

Question 18

What is an example of a country with lots of natural resources?

Answer 18

Saudi Arabia has lots of oil

Question 19

How can we reduce imbalances?

Answer 19

-deflationary monetary or fiscal policies
-depreciate the exchange rate
-improve productivity
-protectionism
-impose currency controls

Question 20

How can we use deflationary monetary or fiscal policy?

Answer 20

-increase tax
-increase interest rates

Question 21

What are the limitations of deflationary monetary or fiscal policy?

Answer 21

Only short term and limit output, causing decreased living standards and growth

Question 22

How can we depreciate the exchange rate?

Answer 22

-reduce interest rates
-tell the BofE to sell domestic currency and buy foreign reserves
-devaluation if fixed exchange rate

Question 23

How does a reduction in interest rates cause a depreciation?

Answer 23

Due to hot money flows, people sell pounds so supply of pounds increases

Question 24

What are the evaluation points for a depreciation of the exchange rate?

Answer 24

-Marshall Lerner condition
-J curve

Question 25

What is the Marshall Lerner condition?

Answer 25

Only works if the sum of absolute values of import and export elasticities is greater than 1. If not, appreciation is needed

Question 26

What does absolute values mean?

Answer 26

Ignoring -ve

Question 27

What is the J curve?

Answer 27

A j shaped curve that shows that PED is inelastic in the short run as it takes time for consumers to adjust their buying habits

Question 28

How can productivity be improved?

Answer 28

-subsidise staff training
-reduce JSA
-reduce trade union power
-reduce immobility of labour by reducing train fares

Question 29

What is the evaluation of supply side policies that improve productivity?

Answer 29

Its slow acting so high short term costs

Question 30

What type of protectionism can be put on to reduce deficits?

Answer 30

tariffs, quotas, excess red tape to reduce import demand

Question 31

What is the evaluation of protectionism?

Answer 31

There is a danger of retaliation and WTO cases

Question 32

How can a country impose currency controls?

Answer 32

Fixed exchange rates, or limits on currency that can enter or leave an economy

Question 33

What is an evaluation of currency controls?

Answer 33

Hidden markets can be created

Question 34

What is an example of a country that has imposed currency controls?

Answer 34

Argentina, only $200 a month can be exchanged and can only exchange pesos at an official bank

Question 35

Why is a current account deficit not a problem?

Answer 35

Its balanced out by a surplus in the capital and financial account

Question 36

When do current account balances become a problem?

Answer 36

When they can’t repay foreign currency debts

Question 37

Why is a surplus bad?

Answer 37

Means low consumption and low savings, which lowers living standards