Balance Of Payments

Question 1

Define balance of payments (full)

Answer 1

(1) an accounting record of exports & import with one country and the rest of the world
(2) consists of 3 parts: current, financial and capital accounts

Question 2

Define current account

Answer 2

Made up of: trades in good & services and primary & secondary income

Question 3

Define trade in goods.

Answer 3

The exports & imports of finished good / tangibles, for example: cars or computers.

Question 4

Define trade in services.

Answer 4

Trading intangibles, for example: financial services or tourism.

Question 5

What is primary income equivalent to and define it ?

Answer 5

(1) investment income.

(2) income made from investing abroad & it includes profit

Question 6

What is secondary income equivalent to and what is it?

Answer 6

(1) current transfers
(2) the final section of the current account from gifts of different countries, donations to charities abroad or overseas aid

Question 7

What does it mean to here current account deficit?

Answer 7

When the value of imports exceeds the value of exports → more money is leaving from the components of CA

Question 8

What does it mean to have current account surplus?

Answer 8

When the value of exports exceed imports → more money is entering the components of CA

Question 9

List 3 factors that impact current account.

Answer 9

(1) exchange rate , (2) savings , (3) inflation

Question 10

How does exchange rates impact CA?

Answer 10

• low exchange rates = cheaper and more competitive exports & expensive imports → higher exports = more income = current account surplus
  ↳ & vice versa for high exchange rates

Question 11

How do savings impact CA?

Answer 11

• Less savings = more money being spent = more consumption = more imports
• more imports than exports means current account deficit

Question 12

How does inflation impact CA?

Answer 12

If inflation rates are high , prices of goods are high , meaning there will be less exports and also less consumption → reading people to import elsewhere
↳ imports > exports = current account deficit.

Question 13

What happens to imports when the £ is strong?

Answer 13

They’re cheaper, so there’s more.

Question 14

What happens to exports if the £ is strong?

Answer 14

They’re more expensive, so there’s less of them

Question 15

What happens to imports if the £ is weak?

Answer 15

They’re more expensive, so there’s less

Question 16

What happens to exports if the £ is weak?

Answer 16

They’re cheaper, so there’s more

Question 17

What would you do on a diagram if: inflation increases?

Answer 17

Ad=right & sras=left

Question 18

What would you do on a diagram if: exchange rates decreased?

Answer 18

Ad = right (because of exports)

Question 19

What would you do on a diagram if: productivity increased?

Answer 19

LRAS = right

Question 20

What would you do on a diagram if: savings decreased

Answer 20

AD = right