Balance of Payment

Question 1

WHat is the BOP?

Answer 1

records all financial transactions made between consumers, businesses and the government in one country with other nations

Question 2

What are inflows of foreign currency counted as ?

Answer 2

positive entry

Question 3

What are outflows of foreign currency counted as ?

Answer 3

negative entry

Question 4

What is the main meausre of external trade performance?

Answer 4

current account of balance of payment

Question 5

WHat are the three sections of the balance of payments?

Answer 5

• current account
• financial account
• capital account

Question 6

What is in the current account?

Answer 6

trade in goods and services ,
investment income,
transfers

Question 7

What is part of the trade balance in goods?

Answer 7

• finished manufactured goods, componants, raw materials, energy products, capital technology

Question 8

What is part of the trade balance in services?

Answer 8

• banking, insurance, consultancy
• tourism, transport, logistics
• shipping, education, health
• research, cultural acts

Question 9

WHat is the trade in goods?

Answer 9

• calculates the value of goods exported by the UK - value of goods imported

Question 10

What is trade in services?

Answer 10

calculates the value of services exported by the UK - value of services imported

Question 11

What is primary income?

Answer 11

flows of income from investments abroad - flows of income from foreign investments located in the UK

Question 12

What is secondary income?

Answer 12

transfers of money recieved in the UK from abroad - transfers of money paid by the UK overseas

Question 13

What does secondary income arise from?

Answer 13

• private transfers
• foreign aid
• grants
• gifts

Question 14

WHy is the overall current account usually a deficit?

Answer 14

deficit on goods outweighs the surplus on services

Question 15

What are the four current account deficit ?

Answer 15

• poor price and non price competitiveness
• strong exchange rate affecting exports + imports
• recesssion in one or more major trade partners
• volatile golbal commodity prices

Question 16

What are some causes of a current account surplus?

Answer 16

• export orientated growth
• foreign direct investment
• undervalued exchange rate
• high domestic saving rates
• strong investment income from overseas investments
• protectionism

Question 17

What are some problems of persistant trade deficit?

Answer 17

• loss of aggregate demand, causes slower real GDP growth and reduced living standards
• loss of jobs in home based industries, regional decline +unemployment
• deficit countries need to import financial capital to achieve balance
• currency weakness and higher inflation
• trade deficit may be a reflection of lack of competitiveness

Question 18

What will a trade deficit mean for imports?

Answer 18

high

Question 19

What are the problems with trade surplus?

Answer 19

if economy is operating ner full capacity, a rise in trade surplus can cause demand pull inflation

Question 19

What are the problems with trade surplus?

Answer 19

if economy is operating ner full capacity, a rise in trade surplus can cause demand pull inflation

Question 20

Where is the biggest source of imports and exports for the UK/

Answer 20

european union

Question 21

reasons for a trade deficit in goods?

Answer 21

• sign of unbalanced economy (lower production of gas + oil)
• high income elasticity in demand, high propensity to consume
• weaknesses on supply - side of economy
• Uk businesses finding it hard to finance a rise in exports
• strong currency

Question 22

Reasons fro trade surplus in services?

Answer 22

• Uk specialising in provision of services, Uk more competitive in provision of services

Question 23

What are the three types of competitiveness?

Answer 23

• cost competitiveness
• non price competitiveness
• non-wage costs

Question 24

What is cost competitiveness?

Answer 24

• difference in unit labour costs

Question 25

What is non price competitiveness ?

Answer 25

• product design, quality, reliability and performance

Question 26

What are non wage costs?

Answer 26

• cost of meeting health / environment regulations
• environmental taxes
• employment protection laws and health and safety laws
• requirements to provide pensions for employees

Question 27

Reasons for UKs lack of competitiveness?

Answer 27

• low investment per capita in the UK (due to growing skill shortage)
• slow IT growth
• low level of investment in manufacturing (
• low savings ratio

Question 28

What are the three policies to reduce trade deficit?

Answer 28

• demand management
• a lower exchange rate
• supply side improvements

Question 29

How can demand management reduce trade deficit?

Answer 29

• tightening of fiscal/ monetary policy, reduces spending power of consumers and lower spending on imports (through cutting gov spending or raising income tax)
• leads to increase in spare capacity

Question 30

How can a lower exchange rate reduce trade deficit?

Answer 30

• lower exhcange rate, increase competitiveness , lower price of exports, imports more expensive

Question 31

How can supply side improvements be made to reduce trade deficit?

Answer 31

• policies to raise productivity, try to increase investment in industries
• policies to encourage business start ups
• investment in education and healthcare
• investment in modern critical infrastructure

Question 32

Policy evaluation?

Answer 32

depends on how much spare capacity , how large output gap is