Balance of payments

Question 1

The current account

Answer 1

• Records trade in goods and services

- Net flow incomes from interest, profit and dividends from UK assets owned overseas.

Question 2

The capital account

Answer 2

• International flows of capital such as inter-country loans or government investments overseas.

Question 3

The financial account

Answer 3

• Net Foreign Direct Investment (FDI)
• Includes government owned assets such as gold, currency reserves and private assets held abroad.
• Short term capital flows such as speculative movements on currency or share investments. Eg. hot money.

Question 4

Foreign Direct Investment

Answer 4

• Establishment of operations or acquiring tangible assets, including states in non UK businesses.
• FDI would be classified as long term capital investment flow.
• May also be used as a vehicle to move closer to new markets.

Question 5

Portfolio investment

Answer 5

• Purchase of financial assets, eg. government bonds or shares, in another country.
• Recently portfolio investment has significantly grown due to globalisation
• Long term in nature but portfolio investment is short term and speculative in nature.

Question 6

Consequences of investment flows between countries (FDI)

Answer 6

• Enhancement of overall capital stock of an economy.

- Creates economic growth and employment which can boost productive potential.

Question 7

Consequences of investment flows between countries (Portfolio investment)

Answer 7

• Easier for UK individuals to purchase shares or bonds overseas, or for UK firms to access global money markets to raise finance.
• Short term and speculative which can create destabilising effects on the international monetary system.

Question 8

Two things to consider when assessing consequences of investment flows

Answer 8

• The type of investment flow

- Long or short term

Question 9

Ways to correct a balance of payments deficit

Answer 9

• Devaluation of currency
• Deflationary policies
• Direct controls

Question 10

Ways to correct a balance of payments surplus

Answer 10

• Appreciation of currency
• Reflation of domestic economy
• Encouraging free trade

Question 11

What does the significance of deficits and surpluses depend on?

Answer 11

• Size of deficit/ surplus (small imbalances may be unavoidable but large imbalances may indicate a weak economy)
• Duration of deficit/ surplus (Persistent deficit/ surpluses are likely to lead to financial government issues and leads to corrective measures which could create other macroeconomic problems)
• Causes of the deficit/ surplus (Eg. strong domestic employment is less significant than lack of competitiveness of domestic industry)

Question 12

reached slide 37

Answer 12

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