Balance of payments

Question 1

Balance of payments (BOP)

Answer 1

a record of all financial transactions made between one country and other nations

Question 2

3 sections of BOP

Answer 2

current account
capital account
financial account

Question 3

credit entries

Answer 3

inflows of money that are counted as positive entries (eg. exports sold overseas)

Question 4

debit entries

Answer 4

outflows of money that are counted as a negative entry (eg. imported goods and services)

Question 5

items in the current account of the BOP

Answer 5

-trade in goods (visible x-m)
-trade in services (invisible x-m)
-primary income (profits,interest etc)
-secondary income (gov aid and gifts)

Question 6

causes of a current account deficit

Answer 6

(TICLES)
Trade policies
Inflation
Climate
Loss of comparative advantage
Economic growth
Spicee (appreciation of currency)

Question 7

causes of current account surplus

Answer 7

-increasing trade policies
-deflation
-increased competitiveness
-recession
-depreciation of currency (WPIDEC)

Question 8

current account deficit

Answer 8

when the total value of debt entries exceeds the total value of credit entries of all sections of the current account

Question 9

current account surplus

Answer 9

value of credit debt

Question 10

consequences of current account deficit

Answer 10

(RADIUS)
Reliance (susceptible to shocks)
AD falls
Depreciation of currency
Industry decline
Unemployment
Size (small deficit self corrects)

Question 11

consequences of current account surplus

Answer 11

-Reliance on others to buy exports
-Aggregate demand rises (inflationary)
-Appreciation of currency SPICEE
-Size (small surplus self corrects)

Question 12

policies to reduce BOP deficit

Answer 12

expenditure-switching policies: increase import tariffs, depreciation of currency, promote domestic produce

expenditure-reducing policies: -increasing income tax, increasing interest rates, cut government spending

Question 13

Marshall-Lerner condition

Answer 13

states that the sum of elasticities of exports and imports must be greater than 1 to impact the BOP situation

Question 14

J-Curve (concept)

Answer 14

business contracts (for imports) need to be acknowledged and in the short term the price of these imports will rise, worsening the BoP, until contracts expire and adjustments can be made to trade

Question 15

capital account

Answer 15

-sale/transfer of patents, copyrights, franchises, leases and other transferable contracts
-debt forgiveness/cancellation
-capital transfers of ownership of fixed assets

Question 16

financial account

Answer 16

includes transactions that result in a change of ownership of financial assets and liabilities between Uk residents and non-residents
-net balance of FDI flows
-net balance of portfolio investment
-balance of banking flows
-changes to value of foreign currency