balance of payments

Question 1

what are the three dimensions of an open economy?

Answer 1

goods and services market, financial markets, factor markets

Question 2

how can you restict goods and services market?

Answer 2

restricted by tariffs quotas and subsidies etc

Question 3

how can you restict financial market?

Answer 3

capital controls that restrcit certain types of investement and or money movements

Question 4

what is the relationship between the domestic economy and the size of the trade sector?

Answer 4

there is a positive relationship between the size of the domestic economy and the size of the trade sector

Question 5

what influences consumer demand for foreign currency?

Answer 5

the exchange rate

Question 6

what does openness in the financial markets allow?

Answer 6

Fincancial investors to diversify – to gold both domestic and foreign assets and speculate on foreign interest rate movements

Allows countries to buy now and pay later- borrowing

This implies that countries can run for some time deficits and surpluses as if you are in defecit it means running down foreign exchange reserves or borrowing from someone else

Question 7

what is the balance of payments?

Answer 7

Balance of payments is a record of countrys trade in goods and services and financial assets with the rest of the world during a particular period of time

Question 8

what are the 3 parts of the balance of payements?

Answer 8

Current account- accounts of flows of goods and services(imports and exports)

Financial account – accounts of flows of financial assets (financial capital)

Capital account- flows of special categories of assets (capitals) such as debt forgiveness

Question 9

what is the relationship between saving and consumption when income is fixed?

Answer 9

there is a negative relationship as to increase consumption you must decrease saving and vice versa

Question 10

what are the leakages from the circular flow?

Answer 10

tax, savings and imports

Question 11

what are the injections into the circular flow?

Answer 11

investment, govt spending, exports

Question 12

when was the uks consistent trade deficit started?

Answer 12

Since 1970 , we have had a trade deficit

Question 13

what is the financial account?

Answer 13

accounts of flows of financial assets (financial capital)

Question 14

what is the current account?

Answer 14

accounts of flows of goods and services(imports and exports)

Question 15

what is the capital account?

Answer 15

flows of special categories of assets (capitals) such as debt forgiveness

Question 16

what does the balance of payments add up too?

Answer 16

The balance of payments should add up to 0 – if not there will be a statistical discrepancy to account for it

Question 17

what is the current account for moth developed countries?

Answer 17

they usually have a current account defecit

Question 18

what are the current accounts for most emerging economys?

Answer 18

they usually have a current account surplus

Question 19

what affects countries spending on goods and sevices?

Answer 19

Weather

Rate of interest on saving and borrowing

The culture of spending and saving

Optimism and pessimism

How far the government provides health, education and pension schemes or how big is the welfare state

The level of current incomes is key

Question 20

what is the main determinent for demand for imports?

Answer 20

domestic incomes

Question 21

what is the main determinent for demand for exports

Answer 21

foreign incomes

Question 22

what is the elasticity of cross border flows of liquid capital ie money and explain the effect?

Answer 22

they are highly price elastic so respond to small movement In interest or exchange rates. So just the expectation of a quarter % rise in interest in wall street can cause massive outflows of reserves from emerging markets and into new york

Question 23

what are the two main issues with using interest rates to attract foreign funds?

Answer 23

High impact of high interest rates on domestic industries- country X cannot use its domestic interest rate to attract foreign funds and simultaneously use monetary policy (low interest rates) to stimulate the micro economy

A country cannot attract inflows of funds to balance its international payments for the long term without having to pay back increasing interest on capital – how long can these interest payments be maintained and how long will the other countrys trust your ability to pay them back

Question 24

how can you balance a persistent balance of payment defecit?

Answer 24

Devaluation of a nations currency – bring down the price of exports, increase the price of imports

Question 25

why affects the impact of a devaluation of a currency on the balance of payments?

Answer 25

the impact on this will depend on the elasticity of foreign export demand and home import demand – a country BOP will improve only if the sum of import and export elasticity are together greater than one – marshall lerner condition

Question 26

what is the only long term sustainable positon for the balance of payments?

Answer 26

The only long term sustainable position is where a country balances its current payments at a level of income which ensures full employment and rates of interest are at the world level

Question 27

what is the J curve

Answer 27

a curve which shows the balance of payments tend to decrease at first after a devaluation due to the marshall lerner condition not being fufilled in the short term but in long term the demand for imports and exports become more elastic leading to a surplus in long run