Balance Of Payments

Question 1

What is the balance of payments (BOP)

Answer 1

Records of all economic transactions between residents of an economy and the rest of the world

Question 2

Components of BOP

Answer 2

Current account
Financial account
Capital account

Question 3

What is current account

Answer 3

Covers all transactions related to international trade in good and services - as well as primary and secondary flows from abroad

Question 4

What is financial account

Answer 4

Covers transactions that result in a change of ownership of financial assets and liabilities between UK residents and foreign residents

Question 5

What is a capital account

Answer 5

Covers sale/purchase of non produced and non financial assets such as patent, copyrights, leases and franchises.

Question 6

Components of current account (1)

Answer 6

Trade balance: a measure of the net international trade in goods and services. The trade balance records the total value of exports minus the total value of imports
Exports: (+) credit item on the current account (money flowing in)
Import: (-) debit item on the current account (money flowing out)
If value of imports is greater than value of imports there is a trade deficit
If value of exports is greater than value of imports there is a trade surplus
2. Primary income balance
3. Secondary income balance

Question 7

Component of current account (2)

Answer 7

Primary income (investment income) balance: the is the value of total earnings received by domestic residents from assets located outside the domestic economy and the total income paid out to foreign owners of assets located in the domestic economy

Secondary income (transfers) balance: net balance on one-way transfers into and out of the domestic economy

Question 8

What is a credit item

Answer 8

Money earned by domestic residents and flowing into the country

Question 9

What is a debit item

Answer 9

Money flowing out to foreigners count as a debit item

Question 10

Current account surplus

Answer 10

Trade balance + net primary and secondary income balance > 0
More money is flowing into the country than is flowing out

Question 11

Current account deficit

Answer 11

Trade balance + net primary and secondary income balance < 0
More money is flowing out of the country than is flowing in

Question 12

Factors influencing current account balance

Answer 12

1. Economic activity in domestic economy
2. Economic activities in other countries
3. Inflation rate in the domestic economy
4. Productivity growth in the domestic economy
5. The exchange rate

Question 13

Possible consequences of CA deficit part 1

Answer 13

1. Downward pressure on the exchange rate
   2.Reduced foreign exchange reserves
2. Increased foreign ownership of domestic assets
3. Loss of domestic sovereignty

Question 14

Possible consequence of CA deficit part 2

Answer 14

1. Possible increase in foreign debt
2. Possible increase in domestic borrowing cost
3. Possible lack of funds to support domestic demand management
4. Negative impact on international credit ratings