Balance Of Payments

Question 1

What is the balance of payments?

Answer 1

The Balance of Payments (BoP) for a country is a record of all the financial transactions that occur between it and the rest of the world

Question 2

What are the components of the balance of payments?

Answer 2

The current account
The financial account and capital account

Question 3

What is the current account?

Answer 3

It records the net income that an economy gains from international transactions

Question 4

What is the capital account?

Answer 4

The Capital Account records small capital flows between countries and is relatively inconsequential

Question 5

What is the financial account?

Answer 5

The Financial Account records the flow of all transactions associated with changes of ownership of the UK’s foreign financial assets & liabilities
These include:
Foreign Direct Investment
Portfolio Investment
Financial derivatives
Reserve Assets

Question 6

What does it mean when there is a current account deficit?

Answer 6

there must be a surplus in the capital & financial account

Question 7

What does it mean when there is a current account surplus?

Answer 7

there must be a deficit in the capital & financial account

Question 8

What causes current account deficit?

Answer 8

Relatively low productivity
Relatively high value of the country’s currency
Relatively high rate of inflation
Rapid economic growth resulting in increased imports
Non-price factors such as poor quality and design

Question 9

What are the measures to reduce imbalances on the current account?

Answer 9

They could do nothing, leaving it to market forces in the foreign exchange market to self-correct the deficit
They could use expenditure switching policies
They could use expenditure reducing policies
They could use supply-side policies