Balance Of Payments

Question 1

What are balance of payments

Answer 1

A record of a country’s transactions with the rest of the world

Question 2

What is a current account surplus

Answer 2

Payment into a country is greater than the payments going out

Question 3

What is a current account deficit

Answer 3

Payment out from a country is greater than the payments coming in

Question 4

What are the 4 parts to the current account

Answer 4

Trade in goods, trade in services, net income flow, net current transfers

Question 5

Examples of primary income

Answer 5

Wages/investment income

Question 6

What is a debit (-)

Answer 6

Money leaving the UK

Question 7

What is a credit (+)

Answer 7

Money coming into the UK from other countries

Question 8

What are investment incomes

Answer 8

I come received on foreign direct investment

Question 9

What is secondary income

Answer 9

Money for nothing. E.g. remittances

Question 10

What are remittances

Answer 10

Transfer of money from a foreign worker to their family in a diff country

Question 11

Impact of inward FDI on UK

Answer 11

Initially a big one off credit. Subsequently a continuous debit

Question 12

What is the connection between a growing economy and trade deficits

Answer 12

After a recession trade deficit often quickly rises

Question 13

How is spending on imports linked to the business cycle

Answer 13

In a book we buy more imports of things we want and in a recession labour costs may fall making UK good cheaper to produce

Question 14

When can a current account deficit become a problem

Answer 14

Persistent deficit, when it forms a large share of GDP, no compensation inflows, low central bank reserves, country has a poor record of repaying debt

Question 15

When do imbalances on the balance of payments occur

Answer 15

When the difference between imports and exports becomes higher than expected

Question 16

What can cause imbalances

Answer 16

Structural or temporary factors. E.g. structural as we are good at services but can’t compete with low wage countries on mass produced goods. Temporary is caused by the economic cycle

Question 17

What can cause a current account deficit

Answer 17

economic growth (higher spending on imports), exchange rate (SPICED), relative competitiveness of an economies exports (wages, productivity, infrastructure, investment)

Question 18

define international trade

Answer 18

exchange of goods and services across international borders

Question 19

define absolute advantage

Answer 19

a country can produce a good or service using fewer resources and at a lower cost than another country

Question 20

define comparative advantage

Answer 20

occurs when a country can produce a good or service at a lower opportunity cost then another country

Question 21

what are the benefits from trade

Answer 21

increase national income, increases consumer choice and stimulates innovation

Question 22

why is stimulating innovation a good thing and define it

Answer 22

the process of translating an idea of invention into a good or service that creates value of for which customers will pay. Helps gain a competitive advantage

Question 23

why is specialization good

Answer 23

more output is produced using the same amount of resources

Question 24

why is comparative advantage important

Answer 24

output will be increased, specialization means higher volumes

Question 25

how come comparative advantage can change over time

Answer 25

non-renewable resources run out, investment in research/development, exchange rates change, import controls e.g. tariffs.

Question 26

what is a fixed exchange rate

Answer 26

pegged. central bank sets exchange rate, maintain exchange rate at target rate

Question 27

what is a floating exchange rate

Answer 27

determined by the forces of supply and demand

Question 28

what causes demand for currencies

Answer 28

exports, inflows of investment. speculative buying (hot-money), central bank buying up their own currencies

Question 29

what effects the supply of a currency

Answer 29

demand for imports, outflows of investment, speculative selling, selling their own currency

Question 30

advantage and disadvantages to fixed exchange rates

Answer 30

+ greater certainty + strong discipline on domestic firms. - fragile - inflexible so take away the natural stabilizer of exchange rates

Question 31

advantages and disadvantages to floating exchange rate

Answer 31

+ provide an automatic adjustment + gives government/monetary authorities flexibility in determining interest rates. - uncertainty - lack of economic discipline (may be inflationary) - effect on FDI

Question 32

What can devaluation cause

Answer 32

raise in AD, keep inflation down, exports may suffer and people may lose their jobs

Question 33

what are the terms of trade

Answer 33

measure the price index of exports divided by the price index of imports

Question 34

terms of trade formula

Answer 34

index of export prices / index of import prices x 100

Question 35

consequences of improving terms of trade

Answer 35

for every unit of exports sold it can buy more units of imported goods, beneficial effect on cost-push inflation, improve standard if living. May cause fall in export volume

Question 36

consequences of worsening terms of trade

Answer 36

every unit of exports sold it can buy fewer units of imported goods, damaging effect on cost-push inflation, reduce standard of living, increase export volumes

Question 37

how important are the terms of trade

Answer 37

tells us how a country may benefit from international trade. Very important for some countries like if they are dependent on primary commodities e.g. Zambia with copper

Question 38

what does international competitiveness measure

Answer 38

the relative cost and value of a countries exports

Question 39

what short-term factors can increase international competitiveness

Answer 39

low inflation, weaker exchange rate

Question 40

what long - term factors can increase international competitiveness

Answer 40

better education, healthcare, infrastructure. Improved national productivity, better quality of goods produced

Question 41

with fixed exchange rates what effects competitiveness

Answer 41

micro factors e.g. cost of materials/labour

Question 42

what can cause fluctuations in the price of primary commodities

Answer 42

occur on the supply-side dur to drought, floods, disease etc...

Question 43

what is the marshall lerner condition

Answer 43

states that a currency devaluation will only lead to an improvement in the balance of payments if the sum of demand elasticity for imports and exports is greater than one

Question 44

what does the J curve effect say

Answer 44

a trade deficit can actually worsen after a depreciation , but get better in the long-term

Question 45

why are exports and imports slow to respond to changes in the exchange rate

Answer 45

short-term demand is inelastic. In the long-term demand becomes more elastic