Balance of Payments

Question 1

What is the financial account?

Answer 1

Measures the increases or decreases in international ownership assets that a country is associated with

Question 2

What is the capital account?

Answer 2

Measures the capital expenditures and overall income of a country

Question 3

What is Foreign Direct Investment (FDI)?

Answer 3

An investment made by a firm in one country into a firm in another country in order to gain control over the foreign firm (recorded in financial+capital account)

Question 4

What are interest rates?

Answer 4

How much interest is paid by borrowers for the money that they borrow (controlled by the Bank of England)

Question 5

How to calculate interest rates?

Answer 5

Amount of interest paid (specific time period)/money before interest x time period

Question 6

What are hot money flows?

Answer 6

Money that investors move internationally between banks to maximise the interest or return that they receive

Question 7

What are the components of the current account?

Answer 7

Trade in goods, trade in services, investment income, current transfers

Question 8

What does the current account measure?

Answer 8

The inflows and outflows of money paid and received in exchange for this imports and exports

Question 9

What is meant by current account equilibrium?

Answer 9

Where total inflows equal total outflows

Question 10

If the current account is in deficit then…

Answer 10

the financial and capital account must be in surplus (vice versa)

Question 11

6 factors that effect the current account?

Answer 11

exchange rates, relative inflation, productivity/costs, quality, growth, protectionism

Question 12

What happens if the £ appreciates

Answer 12

SPICEE - strong pound:imports cheaper, exports (more) expensive (vice versa).

Question 13

How will an appreciation and depreciation effect the current account?

Answer 13

An appreciation in the £ will increase import expenditure, decreasing exports revenue decreasing the current account (outflow>inflow), however, a depreciation in the £ will decrease import expenditure and increase export revenue increasing the current account (inflow>outflow)

Question 14

What is inflation?

Answer 14

Shows us the percentage increase in the general price level

Question 15

How does relative inflation effect the current account?

Answer 15

If country A’s inflation rate is higher than country B’s then consumers are more likely to buy exports as they’re relatively cheaper from country B increasing its export revenue increasing its current account. Demand for country A’s exports will decrease, decreasing their export revenue decreasing their current account

Question 16

How does low productivity effect the current account?

Answer 16

Low productivity leads to high costs leading to a decrease in a country’s current account

Question 17

How does high productivity effect the current account?

Answer 17

High productivity leads to low costs leading to an increase in a country’s current account

Question 18

How does the quality of goods effect the current account?

Answer 18

A country which produces lower quality exports will sell fewer exports, which will cause export revenue to decrease, decreasing the current account (vice versa)

Question 19

As a country’s income increases…

Answer 19

It will import fewer inferior goods and more normal goods

Question 20

What is the difference between inferior and normal goods?

Answer 20

Inferior goods are those for which demand decreases as income increases. Normal goods are those for which, demand increases as income increases

Question 21

How does growth effect the current account?

Answer 21

As consumers import more normal goods, import expenditure will increase , which means the current account will decrease or reduce or worsen (vice versa with inferior goods)

Question 22

How does protectionism effect the current account?

Answer 22

Introduction of protectionist measures such as tariffs will increase the price of exports, causing consumers to switch from imports to domestic goods, decreasing import expenditure, increasing the current account

Question 23

What are government bonds?

Answer 23

Government bonds, or treasury bills, are a method used by the government to borrow money. When a government issues government bonds, they sell a bond to an investor and then pay it back at a later date - with interest

Question 24

Policies to reduce a current account a deficit:

Answer 24

Devaluation of an exchange rate, reducing domestic consumption and spending on imports, supply side policies to improve the competitiveness of domestic industry and exports

Question 25

The Marshall learner Condition

Answer 25

States that a devaluation of will improve the balance on the current account, on the condition that the combined elasticity of demand for imports and exports is greater than 1

Question 26

Monetary Policy

Answer 26

Action that a country’s central bank or government can take to influence how much money is in the economy and how much it costs to borrow

Question 27

Quantative easing

Answer 27

Form of unconventional monetary policy in which a central bank purchases longer-term securities from the open market in order to increase the money supply and encourage lending and investment

Question 28

Fiscal Policy

Answer 28

The use of government spending and taxation to influence the economy

Question 29

7 macroeconomic objectives:

Answer 29

Inflation rate of 2%, economic growth, full employment, current account equilibrium, balanced budget, reduced inequality, environmental sustainability

Question 30

Economic globalisation

Answer 30

The widespread international movement of goods, capital, services, technology and information

Question 31

4 causes of globalisation

Answer 31

Improvements in transport, improvements in IT, containerisation, trade liberalisation

Question 32

Free Market Supply Side Policies

Answer 32

Involve policies to increase competitiveness and free-market efficiency. For example, privatisation, deregulation, lower income tax rates, and reduced power of trade unions