Balance of Payment Issues

Question 1

Balance of Payments

Answer 1

Records all transactions around the world (from 1 country to another)

Question 2

3 Accounts in BOP

Answer 2

Current Account
Financial Account
Capital Account

Current and Financial are the main accounts

Example
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Question 3

Current Account

Answer 3

Trade in goods - eg car
Trade in services - eg employing people overseas
Investment incomes - Primary income
Current Transfers - Secondary Incomes

Question 4

Financial Account

Answer 4

Portfolio investment - Buying/Selling of Financial Assets eg bonds, shares

Foreign direct investment (FDI_ - eg a UK firm moving to another country to trade.

Reserves - eg Currency and Gold.

Question 5

Credit

Debit

Answer 5

Credit - Money entering/credited into a country’s account

Debit - Money leaving the country’s account

Generally
Exports –> Credit
Imports –> Debit

Question 6

Capital Account

Answer 6

Debit Forgiveness (Debit)
Inheritance Tax
Sales of tangible assets (eg buildings)
Sales of intangible assets (eg brand, market position)

Question 7

Budget Surplus

Budget Deficit

Answer 7

Government Spending < Tax

Government Spending > Tax

Budget Deficit is also a negative effect.

Question 8

Consequences of a current account deficit

Answer 8

Lower AD
Debt Burdens
Exchange Rates decrease because imports > exports

Question 9

Expenditure Reducing Policies

Answer 9

In BOP context, government policies to reduce the level of AD in order to reduce imports and boost exports.

Policies the government would implement:

Contractionary Monetary Policy - (IR, Quantitative Easing)

Contractionary Fiscal Policy - (Taxes and GS)

Question 10

Expenditure Switching Policies

Answer 10

In BOP context, government policies designed to switch production currently being sold domestically to exports.

Policies the government would implement:
Protectionism (Tariffs, Quotas

Question 11

Supply Side Policies for solving Balance of Payment Issues

Answer 11

Supply Side Policies to boost international competitiveness, this improves the quality and quantity of factors of production

Supply side policies include:
Reducing labour costs, increasing investment, increasing the skills of the labour force and improving the quality and design of products should lead to increased exports and reduced imports.

The major problem with supply side policies are that it takes often decades to improve the competitiveness of an economy, where as devaluing a currency or deflating an economy can take much less time (a few years)