Balance of Payments

Question 1

state what is meant by the balance of payments surplus.

Answer 1

when the sum of exports of goods, services, investment incomes and transfers is greater than imports.

Question 2

state what is meant by the balance of payments deficit

Answer 2

when the sum of exports of goods, services, investment incomes and transfers is less than imports.

Question 3

the UK has traditionally run a large deficit on the Trade in Goods component on the current account.
Give some reasons why.

Answer 3

• an increase in the demand for consumer goods, many of which have to be imported
• decline in the UK manufacturing sector
• lower production of primary materials such as gas and oil
• a strong currency makes imports more affordable and exports less attractive to foreign buyers

Question 4

the UK has traditionally run a large surplus on the Trade in Services component on the current account.
Give some reasons why.

Answer 4

• specialisation has meant that the UK is more competitive in the provision of these services, and can offer better services at lower costs.
• london has developed as one of the worlds prime financial sectors and become a major source of income and wealth generation in the UK.

Question 5

state some reasons for a balanced deficit.

Answer 5

• high propensity to consume imported goods
• UK firms have become less competitive in the manufacture of goods.
• the UK has an unbalanced economy, relying heavily on the service sector

Question 6

state some reasons for a balanced surplus

Answer 6

• countries such as china produce goods and services that are high in demand
• this leads to global demand for their products
• some countries benefit from a weak exchange rate, leading to higher exports.

Question 7

explain some government policies that can be used to influence the balance of payments.

Answer 7

• controlling consumer spending: raising income tax, leading to a reduction in the demand for imports
• investing in the supply-side of the economy: should improve the productivity of UK firms in terms of quality and price competitiveness.
• depreciation of the exchange rate: through lower interest rates, making exports more price competitive