4.2.6 (4.2.6.2 ONLY)

Question 1

What is the balance of payments?

Answer 1

A record of all the currency flows into and out of a country in a particular time period

Question 2

What are the three main accounts of the balance of payments?

Answer 2

The current account
The capital account
The financial account

Question 3

What does the current account do?

Answer 3

Measures all the currency flows into and out of a country in payment for goods and services which are imported and exported

Question 4

What does the financial account do?

Answer 4

Records capitals flows into and out of the economy

Question 5

What are the 4 components of the current account?

Answer 5

The balance fo trade in goods
The balance of trade in services
Primary income flows
Secondary income flows

Question 6

Why is the current account important?

Answer 6

Reflects and economy’s international competitiveness and the extent to which a country is living within its means

Question 7

What is a current account deficit?

Answer 7

When the currency outflows in the current account exceed the currency inflows

Question 8

What is a current account surplus?

Answer 8

When the currency inflows in the current account exceed the currency outflows

Question 9

What are inward primary income flows?

Answer 9

Income flowing into the economy generated by UK-owned capital assets located overseas

Question 10

What are outward primary income flows?

Answer 10

income flowing out of the economy generated by overseas-owned capital assets located in the UK

Question 11

What are secondary income flows?

Answer 11

Current transfers flowing into or out of the UK economy

Question 12

Examples of secondary income flows

Answer 12

Gifts of money
international aid

Question 13

What does a positive balance on a section int he currency account mean?

Answer 13

A credit item (surplus)

Question 14

What does a negative balance on a section int he currency account mean?

Answer 14

A debit item (deficit)

Question 15

What is a balance in trade of goods?

Answer 15

The part of the current account which measures payments for exports and imports of goods

Question 16

What are primary income flows?

Answer 16

Net income flows made up mostly of investment-income generated from profits, dividends and interest payments flowing between countries

Question 17

What is FDI?

Answer 17

Investment in capital assets in a foreign country by a business with headquarters in another country

Question 18

What is portfolio investment ?

Answer 18

The purchase of one countries securities by the residents or financial institutions of another country

Question 19

What is short run export led growth?

Answer 19

economic growth resulting from an increase in exports which is one of the components of AD

Question 20

What is long run export led growth?

Answer 20

Economic growth resulting from increased international competitiveness of exporting industries

Question 21

Whatare the disadvantages of a BOP defcit?

Answer 21

• weakening of a currency - could lead to inflation
• domestic job losses - increase in unemployment

Question 22

What is the justification for a current account deficit in a poor country?

Answer 22

The country needs to import capital goods to modernize infrastructure and promote economic development
However, the edification could become a means for financing the lifestyle of the wealthy

Question 23

What is a disadvantage of a balance of payments surplus?

Answer 23

STAGNATION
Domestic inflation as cost of production increases
One countries surplus is another’s deficit which could lead to deficit countries having to impose import controls which cause all countries (even surplus) to suffer
Over-reliance on exports

Question 24

What factors influence a country’s current account balance?

Answer 24

Productivity
Inflation
Exchange rate

Question 25

How does inflation influence a country’s current account balance?

Answer 25

If a country’s inflation rate is higher than the rate of other competitor nations, exports will lose their price competitiveness so less demand for their exports

Question 26

What are the types of policy used to cure or reduce a balance of payments deficit?

Answer 26

Expenditure-reducing policy
Expenditure-switching policy

Question 27

What is an expenditure-reducing policy? and give an example

Answer 27

Government policy which aims to eliminate a current account deficit
By reducing the demand for imports by reducing the level of AD
Eg. Contractionary monetary/fiscal policy to create deflation and reduce AD

Question 28

What is an expenditure-switching policy? and give examples

Answer 28

Government policy which aims to eliminate a current account deficit
By switching domestic demand away from imports to domestically produced goods

Eg. direct controls - tariffs
Devaluation - lowering the exchange rate

Question 29

What is a disadvantages of an economy using devaluation to correct a deficit?

Answer 29

It could lead to retaliation devaluations which could harm trade and damage economies

Question 30

Why would cost of production rise during a surplus?

Answer 30

The price of imported components for use in production will rise

Question 31

What is stagnation?

Answer 31

A prolonged period of little or no growth due to high unemployment

Question 32

Why mighty a country experience a current account surplus?

Answer 32

• Recession
• Weak currency
• High interest rates

Question 33

Why mighty a country experience a current account deficit?

Answer 33

• economic growth
• elasticity of demand for imports
• strong currency
• external shocks