Balance of payment - Imbalances

Question 1

When does balance of payments Imbalances occur?

Answer 1

when trade between countries is too one sided over a long period of time

Question 2

How can short-term imbalances be resolved?

Answer 2

With exchange rate - UK import more than export meaning we are constantly supplying more pounds than demanded. If supply of pound os higher than demanded exchange rate will fall. Pound falls exports become cheaper so more investment in the pound and we will export more. Reducing the current account deficit.

Question 3

What can Long term current account deficit do to employment in UK?

Answer 3

creates structural (long term) unemployment

Question 4

What effect may long term current account surplus have for chinas population?

Answer 4

They may have a lower standard of living as wages are kept low so they cannot afford imports of luxury goods. Low wages keeps exports cheap.

Question 5

if you run a current account deficit you will need to run a financial/ capital account …….

Answer 5

Surplus.

Question 6

What does running a financia/capital account surplus mean?

Answer 6

Means foreigners having increasing claim on your asstes which they could desire to be returned at any time - could risk reducing long term income

Question 7

How may a balance of payment deficit effect FDI?

Answer 7

may cause a loss of confidence by foreign investors, they may remove investment and cause a big fall for your currency. May lead to fall in standard of living and lower coinfidence for investment