4.2 Balance of payments

Question 1

Balance of payments

Answer 1

The record of all financial transactions between one country and the rest of the world

Question 2

Current account

Answer 2

The record of trade in goods and services, income flows and transfers between one country and the rest of the world

Question 3

Income flows

Answer 3

Earnings on investments from abroad

Question 4

Transfers

Answer 4

Money sent without the movement of goods or services- could be sending money home

Question 5

Balance of payments on the current account

Answer 5

The total of net trade in goods and services, income flows and transfers between one country and the rest of the world

Question 6

Balanced current account

Answer 6

Where the sum of exports plus the inflow of income and transfers is equal to the sum of imports plus the outflow of income and transfers

Question 7

Current account defecit

Answer 7

When the sum of exports plus the inflow of income and transfers is LESS than the sum of imports plus the outflow of transfers and income.

Question 8

Current account surplus

Answer 8

When the sum of exports, inflow of income and transfers is MORE than the sum of exports, and outflow of income and transfers

Question 8

Give a fact about UK consumers and imports

Answer 8

UK consumers have a high propensity to spend on imported goods

Question 9

Give a stat about the current account in the UK

Answer 9

from 1995 to 2015, the UK current account defecit has grown

Question 10

What do you need to keep in mind when evaluating the importance of the current account to the economy

Answer 10

Whether its a defecit or a surplus
The size and duration of the defecit or surplus

Question 11

What is important about a current account defecit, if its quite deep (demand)

Answer 11

• It could be linked with a fall in demand of domestic goods- Low employment, Less taxes
  And if it is a factor that will take a long time to change (low productivity) then its more significant

Question 12

What is important about a current account defecit if its not that deep

Answer 12

The current account defecit could be for a short period of time
For example importing raw materials to then make final goods and services out of
Could only be a small percentage of the GDP

Question 13

What is the effect of a current account surplus if it is good

Answer 13

Rising total demand for domestic goods
Leads to unemployment
More tax revenue
Decreases countries debt

Question 14

What is the effect of a current account surplus if it is bad

Answer 14

The total demand would increase leading to demand push inflation
Lead to a rise in the exchange rate which can lead to decrease in international competitiveness

Question 15

Causes of a current account surplus (3)

Answer 15

• Strength of the economy
• Lack of growth in the domestic economy- - - Consumers within the economy dont buy imports
• Fall in the exchange rate- Buying imports is more expensive so it drops and exports are cheaper

Question 16

Causes of a current account defecit (4)

Answer 16

• Structureal problems in the economy- no infrastrucutre
• Falling incomes overseas- Falling exports
• Rise in the exchange rate so exports dearer and imports cheaper
• Net outflow of investments