Balance of payments

Question 1

Balance of payments

Answer 1

A record of country’s financial transactions with the rest of the world. It is made up of the current, capital and financial accounts

Question 2

Deficit and Surplus

Answer 2

Deficit-When outflows are bigger than inflows
Surplus-When inflows are bigger than outflows
In theory, a deficit on the current account should correspond to a surplus on the capital and financial accounts and vice versa.

Question 3

The current account

Answer 3

A measure of how competitive a country is in terms of exports vs imports. It is made up of balance of trade in goods and services and balance of primary and secondary incomes. Each individually is in a deficit or surplus and combines to be a deficit or surplus current account,

Question 4

3 important factors of surplus/deficit

Answer 4

-Productivity-A country where workers produce more and better products than others will have a competitive advantage
-Exchange rates-Can make exports and import more or less attractive to consumers
-Inflation- When compared to competitors, it may or may not provide a price competitive edge

Question 5

Balance of primary income

Answer 5

Income earned by residents of a country from foreign sources. Its largest component is net investment income.

Question 6

Net investment income

Answer 6

The difference between inward and outward flows of investment income. This can be split into direct investment and portfolio investment

Question 7

Direct investment

Answer 7

Putting money into capital, technology and more types of projects abroad. Income comes due to profits earned.

Question 8

Portfolio investment

Answer 8

Buying shares and bonds issued by overseas companies. Incomes comes from dividends and interest.

Question 9

Balance of secondary incomes

Answer 9

Refers to one way transfers between countries where there is no exchange of goods, services or financial assets. Formerly known as the current transfers balance.

Question 10

Transfers

Answer 10

Payment made between countries without anything of economic value received in return e.g. foreign aid

Question 11

The capital account

Answer 11

It records the inflows and outflows of capital e.g. domestic purchase of foreign assets. Recently most of these items moved to the financial account so the capital account is no longer a significant part of BOP

Question 12

The financial accounts

Answer 12

It records the transactions that involve the change of ownership of international financial assets and liabilities. It involves direct, portfolio and other types of investment as well as reserve assets