Balance of payments

Question 1

What is the current account of balance of payments

Answer 1

Trade in goods and services.
Primary income- overseas transfers
Secondary income- aid and grants

Question 2

What is the capital account

Answer 2

The transfer of fixed assets
For example: When an immigrant comes to the UK there assets are now part of the UK

Question 3

What is the financial account

Answer 3

Foreign direct investment
Balance of banking flows- Hot money

Question 4

What are causes of a current account defecit

Answer 4

• Poor Competitiveness- e.g higher relative inflation, low levels of industry capital investment
• Strong Exchange Rate- Less exports, they’ve become expensive and More Imports they’ve become cheaper
• Volatile global prices
• Structural Problems

Question 5

What are the consequences of a current account deficit

Answer 5

-Drop in AD- more unemployment, Reduced standards of living
-Depreciation of Currency-higher cost push inflation
- less investment- lower confidence

Question 6

What are the causes of a current account surplus

Answer 6

• Savings and investment- High domestic savings , High Private and Government investment.
  -Inelastic Exports
  -Weak Exchange Rate- less imports, more exports

Question 7

What are the consequences of a current account surplus

Answer 7

• Investment from overseas
• Stagnation–> Low domestic demand–>negative economic growth–>high unemployment (Japan)
  -Over reliance on exports

Question 8

Policies to reduce a current account deficit

Answer 8

• Supply side policies to reduce Prices of Domestic Goods
  -Restrict Imports : Tariffs, Quotas etc.
• Fiscal / Monetary policy to reduce spending on imports.

Question 9

Policies to reduce a current account surplus

Answer 9

Raising currency value: will reduce exports, increase imports

Question 10

What does the J curve effect show?

Answer 10

Possible time lag between a falling currency and an improved trade balance