balance of payments

Question 1

current account formula

Answer 1

exports - imports

Question 2

cause of deficit

Answer 2

high consumer spending and AD - more imports especially if the country is a net importer
poor international competitiveness (high inflation relative to other countries or poorer tech and efficiency of production)
external shocks - rise in raw material prices eg oil because these are generally imports for most countries

Question 3

causes of surplus

Answer 3

recession - low AD and thus lower imports and the country may focus on export selling
low value exchange rate
high interest rates so more saving

Question 4

consequences of deficit

Answer 4

indication of uncompetitiveness
domestic unemployment because not enough focus on exports
deficit needs to be funded by borrowing money sometimes which is unsustainable because increases debt
risk of depreciation of currency

Question 5

consequences of surplus

Answer 5

stagnation - low domestic demand for imports so low growth or even negative growth
may be due to overreliance on exports - very prone to shocks

Question 6

how to solve deficit policies

Answer 6

supply side policies to boost domestic production to sell more exports
impose restrictions on imports however may cause inflation
depreciate currency but depends on MLC

Question 7

how to solve surplus policies

Answer 7

raise value of currency to reduce demand for exports

trade barriers and tariffs