Balance of Payments

Question 1

What are the three components of the BoP

Answer 1

Current account
capital account
financial account

Question 2

what does the current account involve

Answer 2

trade in goods and services, net primary and secondary income

Question 3

what does the capital account involve

Answer 3

transfers of ownership of fixed assets and contracts

Question 4

what does the financial account involve

Answer 4

FDI portfolio and banking flows, gold and foreign currency reserves, estimated errors

Question 5

what are portfolio flows

Answer 5

debt and equity

Question 6

What is the main rule for the BoP

Answer 6

money in all accounts must always equal zero

Question 7

Where does 20% of UK trade go

Answer 7

USA

Question 8

What is the main means to balance the account

Answer 8

selling debt

Question 9

How can consumer spending cause deficit on the BoP

Answer 9

• If spending is high consumers and firms will buy more imports
• if demand for imports is inelastic they will remain high

Question 10

How can external shocks cause deficit on the BoP

Answer 10

• cause raw materials price to rise so price of imports will rise
• economic downturn in a country that one country may be exporting to will worsen exports
• Imposition of trade barriers may worsen exports to certain countries

Question 11

How can international competitiveness cause deficit on the BoP

Answer 11

• worse international competitiveness will reduce exports
• developed countries can’t compete with low costs of production and thus price in developing countries so their exports are less desirable
• Some countries exports are higher quality due to better tech
• rise in value of currency SPICED
• Inflation causes exports to fall as they are more expensive and imports to rise

Question 12

What are the causes of a current account surplus

Answer 12

• low value of currency WIDEC
• High interest rates mean less spending on imports
• recession means that domestic producers will look to sell internationally and there will be reduction in domestic spending

Question 13

How can supply side policies rectify a current account deficit

Answer 13

• Subsidies to decrease cost of production
• decrease corp taxes
• increase min wage
• deregulation to make businesses more efficient
• invest in R and D

–> If CA deficit as % of GDP is worse than growth rate then it is an issue

Question 14

How can tight monetary policy rectify a current account deficit

Answer 14

If it is successful in being deflationary then may increase appeal of exports globally as they become cheaper
–> raising interest rates can make the pound stronger

Question 15

How can protectionism help to rectify a current account deficit

Answer 15

• Impose tariffs to make imports more expensive or put a quota to reduce supply
  –> Retaliation and WTO rules

Question 16

How can exchange rate policy help to rectify a current account deficit

Answer 16

weaken the pound makes exports cheaper and increase demand worldwide.
–> ML condition, J curve

Question 17

what are the three methods to weaken the pound

Answer 17

• increase money supply with QE
• sell domestic currency reserves
• reduce interest rates

Question 18

What can be the global impacts of countries correcting imbalances on their current account

Answer 18

• supply side policies can lead to increase in world trade
• Protectionism can lead to trade wars
• one country increasing exports can effect other developing countries negatively

Question 19

What are long term flows

Answer 19

FDI and portfolio investment that is very predictable

Question 20

What are short term flows

Answer 20

Based on speculation and is firms trying to quickly make money through changes in the exchange rates

Question 21

Why does the deficit not matter

Answer 21

• Partial autocorrection when there is a deficit currency weakness
• Financial account governments can just sell debt

Question 22

why doe the deficit matter

Answer 22

• structural weakness if country is dependent on imports
• unbalanced economy
• unemployment
• financing the debt is only short term

Question 23

What is fiscal drag

Answer 23

When the government freezes tax allowance thresholds but inflation and wage increases causes people to pay more tax