Balance Of Payments

Question 1

Describe bop

Answer 1

Measure county’s transactions with the rest of the world
Record money coming in and out of a country

Question 2

Parts of bop

Answer 2

Current account
Capital account
Financial account

Question 3

Describe current account

Answer 3

Record payments for trade in goods and services plus net flows of primary and secondary income

Question 4

Define trade in goods

Answer 4

Buy and sell physical products trade in services
Transactions of non tangible items

Question 5

Causes of current account deficit
Demand side

Answer 5

Strong domestic growth
Recession overseas
Strong pound= strong exchange rate

Question 6

Causes of current account deficit
Supply side

Answer 6

Low investments
Low productivity
High unit labour costs
High relative inflation
Poor quality of goods

Question 7

Consequences of current account deficit

Answer 7

AD shift to left
= real GDP lower
= high unemployment
= low GDP growth and weaker investments

Question 8

Causes of current account surplus
Demand side

Answer 8

Strong domestic growth abroad
Recession in UK
Weak pound= weak exchange rate

Question 9

Causes of current account surplus
Supply side

Answer 9

Low inflation in UK
Low labour costs
Strong investments in tech and capital in UK= low unit costs

Question 10

Define net errors and omissions

Answer 10

Reflect imbalances resulting from imperfections in source data
= ensure accounts in a country’s BOP statement always sum to zero

Question 11

Define primary income

Answer 11

Money received and earned from activities abroad
Interest, dividends and profits

Question 12

Define secondary income

Answer 12

Transfers between countries
Contribution of EU, military aid overseas

Question 13

what does the financial account measure

Answer 13

• portfolio investment transactions= buying and selling financial assets eg bonds, shares etc
• foreign direct investment flows
• reserves in currency or gold= type of investment to absorb imbalances or financing payments= easy to transfer

Question 14

describe current account deficit

Answer 14

a measurement of a country’s trade where the value of the goods and services it imports exceeds the value of the products it exports
= more money leaving country than entering
= not sustainable in the LR= owe money to rest of world

Question 15

how do countries fix current account deficit

Answer 15

uses surpluses from financial or capital accounts= balance the account and BOP

Question 16

describe other uses of financial and capital account

Answer 16

to fox the current account deficit

Question 17

how can a country current account surplus

Answer 17

• country will have excess cash= will sell more to the rest of the world= invest cash into a country with a current account deficit= will cause a financial asset deficit due to increase cost of outflow= balance BOP
• country will buy financial assets like gov bonds etc in other country w deficit= will know investment is safe and secure= give good rate of return

Question 18

define current account

Answer 18

represents a country’s imports and exports of goods and services, payments made to foreign investors, and transfers

Question 19

describe the roles of the current account

Answer 19

• measure trade in goods (imports and exports) and services= trade balance
• measure income flow leaving and entering
• measure transfers of gov eg EU fees, aid etc

Question 19

causes of current account deficit

Answer 19

demand
- strong domestic growth= incomes are high= ppl willing to buy imports= increase money leaving= worsen CA deficit
- recession overseas= incomes abroad decrease= demand for imports decrease= decrease uk exports= decrease rev
- strong exchange rates= imports will be cheaper= expensive exports= decrease export revenue= increase money leaving uk

supply
- low investment, low productivity, increase inflation, increase unit labour costs= due to lack of competition of exports
- poor quality goods made, depletion of resources= cause exports to decrease= decrease export revenue

Question 20

consequences of current account deficit

Answer 20

• decrease AD= decrease growth= increase unemployment

Question 21

evaluate consequences of current account deficit

Answer 21

depends on the size of the deficit=
CA is an indicator of a good or bad economy
cause of supply side CA deficit more detrimental= increase negative effects