Balance of payments

Question 1

The current account

Answer 1

Trade in goods and services
Income and current transfers

Question 2

Capital account

Answer 2

Money entering (remittances)
Money leaving (money abroad)

Question 3

Financial account

Answer 3

Value of investments

Question 4

Causes of deficits

Answer 4

Higher incomes, higher demand, higher imported goods

Strong exchange rate, imports are cheaper, import more goods

High inflation, exports expensive, import more goods

Question 5

Which countries have developed comparative advantages?

Answer 5

China due to low labour costs, costs of manufacturing fell, cheap exports

Question 6

Why does the UK have a deficit?

Answer 6

Lack of investment, old technology, low producivity, high prices

Deindustrialisation, North East England, less manufactured goods

Skills shortages

Lack of capital after the financial crisis, limited borrowing, limited spending

Question 7

Demand side policies to reduce a deficit

Answer 7

A deficit comes from high income elasticity of demand

Increase income tax, less disposable income, less demand for imports

However, this will decrease GDP and growth. Lower living standards.

Question 8

Supply side policies

Answer 8

More capital investment, better quality technology, more producitivity, lower export costs

Question 9

Expenditure switching policies

Answer 9

Tarrifs, higher import prices, reduce imports

Control inflation, cheaper exports, more competitive

Devalue the currency (China), exports cheaper, imports more expensive

Question 10

Deficit and imbalance effects

Answer 10

Unable to pay off their debts

Seen as struggling countries

Financial crisis (lack of assets) more risk