Balance of Payment and Policy Conflicts

Question 1

What are the three sections in the balance of payments?

Answer 1

• current account
• capital account
• financial account

Question 2

What is the current account?

Answer 2

concerned with flows of income from trade, the use of factors of production and other transfers between countries

Question 3

What are the four parts of the current account?

Answer 3

• trade in goods
• trades in services
• primary income (net investment incomes)
• secondary income ( transfer of money between countries)

Question 4

Explain the trade in goods?

Answer 4

• calculates value of goods exported by the UK minus the value of goods imported
• usually runs a deficit

Question 5

Explain trade in services?

Answer 5

• calculates value of services exported by the UK - value of services imported
• typically runs a surplus

Question 6

What are the major services exported by the UK?

Answer 6

in financial services industry (banking and insurance)

Question 7

What is primary income?

Answer 7

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

Question 8

Give examples of UK earnings abroad?

Answer 8

• dividends, interest earned abroad, profits and wages paid by UK-owned direct investments in businesses located abroad

Question 9

What is the current status of the primary income for the UK?

Answer 9

moving into a deficit

Question 10

Why has the UK got a deficit in primary income?

Answer 10

• rapid growth in investment in the UK by investors in China and india (creating flows of income back to those countries)

Question 11

What is secondary income?

Answer 11

trasnfers of money recieved in the UK from abroad minus transfer of money paid by the UK overseas

Question 12

What does secondary income arise from?

Answer 12

• private transfers
• foreign aid
• grants
• gifts

Question 13

What status if the current account usually in?

Answer 13

a deficit

Question 14

What factors determine exports for the UK?

Answer 14

• foreign GDP
• productivity
• inflation
• exchange rates

Question 15

How does foreign GDP determine exports?

Answer 15

• as foreign GDP rises, spending in those countries will also rise, leading to greater demand for UK goods and services

Question 16

How does productivity determine exports?

Answer 16

• if UK productivity rises relative to foreign productivity, Uk firms can produce more output for a proportionately smaller amount of inputs, decreasing cost per unit, making firms more competitive, boosting demand for UK goods

Question 17

How does inflation effect exports?

Answer 17

• UK inflation is higher than foreign inflation, prices of UK goods rising faster then overseas. UK goods less price competitive and foreign buyers will switch to substitutes

Question 18

Effect of exchange rates on exports?

Answer 18

• stronger pound will buy more foreign currency, but cause exports to fall as they are more expensive

Question 19

What factors determine imports?

Answer 19

• UK GDP

- Exchange rates

Question 20

How does UK GDP effect imports?

Answer 20

• as UK GDP rises, spending in the UK rises, amount of goods + services imported rises along with consumption
• higher volume of imports could deteriorate trade balance on current account

Question 21

Effect of exchange rate on imports?

Answer 21

• strong pound buys more imports but less exports

Question 22

What are the key macroeconomic objectives?

Answer 22

• sustainable economic growth
• price stability
• minimising unemployment
• stable balance of payments

Question 23

When do negative output gaps occur?

Answer 23

when actual growth is below trend growth

Question 24

What is a consequence of a negative output gap?

Answer 24

• cyclical unemployment is likely to increase (resources not employed, workers become unemployed

Question 25

What is a positive output gap?

Answer 25

• actual growth is abobe trend growth

Question 26

What is the problem with a positive output gap?

Answer 26

• eventually lead to rising prices, risk of inflation

Question 27

When does a policy conflict exists?

Answer 27

when attempts to solce one economic problem lead away from solving another

Question 28

Which policy objectives need increasing AD?

Answer 28

• Short run economic growth
• reducing cyclical unemployment
• eliminating a budget deficit

Question 29

Which policies need a lower aggregate demand?

Answer 29

• reducing demand pull inflation
• improving current account balance
• eliminating a budget deficit

Question 30

What are the common conflicts of policy?

Answer 30

• minimising unemployment and keeping inflation low and stable
• increasing economic growth and achieving balance on the current account
• reducing budget deficit through cutting gov spending and achieving economic growth