Balance Of Payments

Question 1

Current account deficit

Answer 1

When the total value of debit entries is greater than the total credit entries

Question 2

Current account surplus

Answer 2

When the total value of credit entires is greater than the total debit entries

Question 3

Trading deficit

Answer 3

When the value of imports exceeds exports

Question 4

Trading surplus

Answer 4

When the value of exports exceeds imports

Question 5

Causes of a current account deficit (6)

Answer 5

Trade policies
Inflation
Climate
Loss of comparative advantage
Economic growth
Strong currency

Question 6

Causes of a current account surplus

Answer 6

Trade policies
Low inflation
Gain of comparative advantage
Economic slump
Weak currency

Question 7

Problems with persistent trade deficit (6)

Answer 7

Reliance
AD fall
Depreciation of currency
Industry decline
Unemployment
Size of deficit determines effect

Question 8

Problems with persistent Trade surplus (4)

Answer 8

• If GDP is close to capacity a rise may cause demand-pull inflation
• Persistent trade surplus: protectionism from other trade deficit nations
• If due to high saving or low consumption living standards may be low
• Exporting high-price commodities is volatile/unpredictable

Question 9

Stages of BOP disequilibrium self-correction (5)

Answer 9

• Currency is free floating
• M>X = Deficit
• X falls, demand for £ falls
• WPIDEC : M falls, X rises
• M = X

Question 10

Economic Policies to Reduce a trade deficit (5)

Answer 10

• Protectionism policies (tariffs)
• Encourage domestic consumption
• Deprecating currency
• Increase income tax
• Improve productivity