Balance of Payments

Question 1

BOP definition

Answer 1

All financial transactions between consumers, business and the G of a country with the rest of the world

Question 2

Structure of BOP

Answer 2

Current Account
Capital Account
Financial Account
Balancing Items

Question 3

Current Account

Answer 3

Balance of trade in goods
Balance of trade in services
Net primary income
Net secondary income (transfer payments)

Question 4

Causes of Current Account Deficit

Answer 4

Growing domestic economy

• firms want to increase output
• > import raw materials and capital goods
• HH income increases
• > living of standard increases
• > higher spending on imports

Recession overseas

• incomes abroad decreases
• D M decreases
• Revenue generated from our exports decreases

Lose international competitiveness

• poor quality, high relative inflation, low productivity
• foreigners would rather buy from other countries

Repletion of resources
- if dependant, exports decreases

Question 5

Evaluation: Causes of CAD

Answer 5

Supply side is more destructive than demand side

Supply side : long term and hard to rectify

Question 6

Effects of CAD

Answer 6

AD decreases

• (X-M) decreases
• reduction in growth
• D for domestic good decreases
• output decreases
• unemployment

Debt burden

• investors lose confidence
• people sell currency: depreciation
• currency crisis

ER decreases

• Import > export
• Currency S > D
• Suffer from high import prices
• Could automatically correct a CAD but could lead to stagflation (high inflation, low growth)