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Macroeconomics > Balance Of Payments > Flashcards

Balance Of Payments Flashcards

1
Q

What are balance of payments

A

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

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2
Q

What is a current account surplus

A

Payment into a country is greater than the payments going out

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3
Q

What is a current account deficit

A

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

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4
Q

What are the 4 parts to the current account

A

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

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5
Q

Examples of primary income

A

Wages/investment income

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6
Q

What is a debit (-)

A

Money leaving the UK

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7
Q

What is a credit (+)

A

Money coming into the UK from other countries

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8
Q

What are investment incomes

A

I come received on foreign direct investment

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9
Q

What is secondary income

A

Money for nothing. E.g. remittances

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10
Q

What are remittances

A

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

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11
Q

Impact of inward FDI on UK

A

Initially a big one off credit. Subsequently a continuous debit

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12
Q

What is the connection between a growing economy and trade deficits

A

After a recession trade deficit often quickly rises

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13
Q

How is spending on imports linked to the business cycle

A

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

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14
Q

When can a current account deficit become a problem

A

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

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15
Q

When do imbalances on the balance of payments occur

A

When the difference between imports and exports becomes higher than expected

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16
Q

What can cause imbalances

A

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

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17
Q

What can cause a current account deficit

A

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

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18
Q

define international trade

A

exchange of goods and services across international borders

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19
Q

define absolute advantage

A

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

20
Q

define comparative advantage

A

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

21
Q

what are the benefits from trade

A

increase national income, increases consumer choice and stimulates innovation

22
Q

why is stimulating innovation a good thing and define it

A

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

23
Q

why is specialization good

A

more output is produced using the same amount of resources

24
Q

why is comparative advantage important

A

output will be increased, specialization means higher volumes

25
Q

how come comparative advantage can change over time

A

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

26
Q

what is a fixed exchange rate

A

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

27
Q

what is a floating exchange rate

A

determined by the forces of supply and demand

28
Q

what causes demand for currencies

A

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

29
Q

what effects the supply of a currency

A

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

30
Q

advantage and disadvantages to fixed exchange rates

A

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

31
Q

advantages and disadvantages to floating exchange rate

A

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

32
Q

What can devaluation cause

A

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

33
Q

what are the terms of trade

A

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

34
Q

terms of trade formula

A

index of export prices / index of import prices x 100

35
Q

consequences of improving terms of trade

A

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

36
Q

consequences of worsening terms of trade

A

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

37
Q

how important are the terms of trade

A

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

38
Q

what does international competitiveness measure

A

the relative cost and value of a countries exports

39
Q

what short-term factors can increase international competitiveness

A

low inflation, weaker exchange rate

40
Q

what long - term factors can increase international competitiveness

A

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

41
Q

with fixed exchange rates what effects competitiveness

A

micro factors e.g. cost of materials/labour

42
Q

what can cause fluctuations in the price of primary commodities

A

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

43
Q

what is the marshall lerner condition

A

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

44
Q

what does the J curve effect say

A

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

45
Q

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

A

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

Macroeconomics (8 decks)

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