4.2 Balance of Payments

Question 1

What is meant by balance of payments?

Answer 1

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

Question 2

What does the balance of payments measure?

Answer 2

The relative performance of the UK in a global economy.

Question 3

What is the current account?

Answer 3

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

Question 4

What are income flows?

Answer 4

Earnings on investments abroad.

Question 5

What are transfers?

Answer 5

Movement of money, goods or services without any requiring something in return.

Question 6

What is meant by a 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 incomes and transfers.

Produces same amount that it consumes.

Question 7

What is meant by a current account surplus?

Answer 7

Where the sum of exports plus the inflow of income and transfers is greater than the sum of imports plus outflow of income and transfers.

Produces more than it consumes.

Question 8

What is meant by a current account surplus?

Answer 8

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

Produces less than it consumes.

Question 9

How do you calculate a current account deficit/surplus?

Answer 9

Adding together all items under trade in goods and services, income flows and transfers.

Question 10

Will there be a negative/positive number in a current account surplus?

Answer 10

Positive number.

Question 11

Will there be a positive/negative number in a current account deficit?

Answer 11

Negative number.

Question 12

Imports > Exports

What is the importance of a current account deficit?

Answer 12

• Can show falling demand for domestic goods usually caused by poor quality and competitiveness
• Increases debt of a country as they are consuming more than producing
• Can increase unemployment in domestic country

Question 13

Evaluation

Why may a current account deficit for a country not be a concern?

Answer 13

• It could be temporary (importing raw materials to produce goods to export)
• It reduces demand pull inflation within the domestic economy
• Over time, it can lead to a fall in the exchange rate which can increase the UK’s international competitiveness, thus increasing exports

Question 14

Export > Imports

What is the importance of a current account surplus?

Answer 14

• Reflects the rising demand for domestic goods, linking to decreased unemployment
• Decreases a country’s debt as more money is flowing into a country than flowing out for imports

Question 15

Why may a current account surplus for a country not be a benefit?

Answer 15

• Can increase demand pull inflation within the domestic economy as demand increases, causing prices to rise
• It leads to a rise in the exchange rate, resulting in lower international competitiveness, eventually decreasing exports

Question 16

Exports > Imports

What are the three causes of a current account surplus in the UK?

Answer 16

1. The UK’s economy could be strong, meaning they can export more.
2. Rising incomes in foreign economies means they demand more UK products, increasing our exports.
3. Fall in the exchange rate may increase quantity of exports demanded as prices are now cheaper, but our imports fall.

Question 17

Exports < Imports

What are the three causes of a current account deficit in the UK?

Answer 17

1. Structural problems in the overseas economy leads to falling demand for UK goods
2. Rising incomes in the domestic economy means people can import more in the UK
3. A rise in the exchange rate for the UK reduces demand for our exports, meaning that we import more and export less