4.2 Balance Of Payments

Question 1

Balance of payments definition

Answer 1

It records all the flows of money coming in and going out of a country

Question 2

Current account definition

Answer 2

Records trade balance, income flows and transfers between one country and the rest of the world

Question 3

What does the BoP current account record?

Answer 3

1) trade - trade balance is the net total of trade in goods and services
2) primary income (investment income) - difference between resident income and non-resident income
3) secondary income ( current transfers) - the difference between all transfers

Question 4

Current account surplus

Answer 4

(Positive balance) occurs if overall income inflows are greater than outflows, leads to an increase in income for the economy

Question 5

Current account deficit

Answer 5

(Negative balance) occurs if overall income inflows are less than overall income outflows, fall in income for the economy

Question 6

Eval importance of BoP current account to the UK economy

Answer 6

• whether the BoP current account is in deficit or surplus
• the size and duration of the BoP current account surplus or deficit
• the effect of the BoP current account balance within the BoP

Question 7

Causes of BoP current account surpluses

Answer 7

• internationally competitive exports , external buyers are likely to import due to low price or high quality
• lack of growth in the domestic economy, less domestic demand for imports
• a fall in the exchange rate, exports become cheaper to foreign buyers, imports become more expensive

Question 8

Causes of BoP current account deficit

Answer 8

• internationally uncompetitive, high prices or low quality of exports, export revenue is low
• high consumer demand in domestic economy, more demand for imported goods and services
• increase in the exchange rate, exports become more expensive to foreign buyers, imports become less expensive for domestic buyers, lead to increasing imports

Question 9

Importance of BoP current account deficit to UK economy

Answer 9

• may reflect that the total demand for domestically produced goods and services is low, could lead to increased unemployment and decreased tax revenue for the government.
• could show low productivity in UK economy, means deficit is less likely to be temporary
• may increase the international debt of the UK, if imports were payed for using borrowing and not financed by export revenue
• may lead to a decrease in the inflation rate

Question 10

Importance of a BoP current account surplus for the UK

Answer 10

• reflects that total demand for domestically produced goods and services is high, leads to increased income for the UK economy, increasing growth, decrease unemployment and increase tax revenue.
• reduce external debt for the UK, additional income can be used to pay the debt
• may cause increased inflation, as high demand from foreign buyers may cause demand-pull inflation