Balance of payments [2.1.4]

Question 1

What is trade?

Answer 1

Trade involves the buying and selling of goods and services with otHer countries.

Question 2

What does the UK trade?

Answer 2

Services
Cars
Planes
Pharmaceutical products

Question 3

Why does countries trade?

Answer 3

Countries trade when they do not have the resources or capacity to satisfy their own needs and wants.
By specialising in some goods, countries can produce a surplus and trade this for the resources they need

Question 4

What are the reasons to trade?

Answer 4

To specialise and obtain things that a country cannot produce gives consumers more choice. Range of prices which can push it down.

Question 5

What are the reasons against trade?

Answer 5

Can become reliant on manufacturing less competitive.

Question 6

What are the UK’s top 3 exports?

Answer 6

1) Nuclear reactors boilers machinery.
2) Mineral fuels, mineral oils.
3) Vehicles other than railway.

Question 7

What are the UK’s top 3 imports?

Answer 7

1) Mineral fuels, mineral oils
2) Nuclear reactors, boilers and machinery
3) Vehicles other than railway

Question 8

Why does the UK export goods?

Answer 8

Find a market for excess production that cannot be sold at home.

Question 9

Why does the UK import goods?

Answer 9

Goods not available in the domestic market. Goods that are less expensive or better quality from abroad. Wider range of products.

Question 10

What are the impact of exports?

Answer 10

Exports create income for UK firms and employment opportunities, Injections into the circular flow of income.

Question 11

What are the impacts of imports?

Answer 11

Imports allow consumers to buy cheaper goods reducing inflation. Imports allow firms to acquire raw materials for production reducing costs.

Question 12

What is the balance of payments?

Answer 12

A record of all international financial transactions made by residents of a country. 3 Main types, current account, capital account, finacial account

Question 13

What are inflows of balance of payments?

Answer 13

Inflows of a currency are counted as a positive entry or credit (e.g. exported goods)

Question 14

What are outflows of balance of payments?

Answer 14

Outflows of a currency are counted as a negative entry or debit (e.g. imported goods)

Question 15

What is the current account of BOP?

Answer 15

Current account BOP records transactions made between consumers, businesses and the gov in one country with other nations.

Question 16

What are the 4 parts of the current account of the BOP?

Answer 16

Trade in balance in goods - Finished manufactured goods, components, raw materials. Energy products tech and machinery. Visible because can see them. Goods that are traded.

Trade balance in service - Banking, insurance, consultancy. Tourism. Shipping , education, health. . Services traded out of the country known as invisible. Invisible money transfer.

Net money transfers - Overseas aid/debt relief. Private money transfers.

Net investment income from overseas assets - Profits interests and dividends from investments in other countries.

Question 17

What is the trade position of the UK?

Answer 17

The UK economy operated with a deficit on the current account balance of payments.
This means that more money flows out due to trade than flows in. =

Question 18

What impact does a current account deficit have on an economy?

Answer 18

UK’s balance of payments deficit means UK imports more than it exports and must borrow money from other countries to pay for its imports. Makes UK a net borrower from rest of the world

Question 19

What are the reasons for a current account deficit?

Answer 19

Overvalued exchange rate - Overvalued exchange rates meaning exports are more expensive but imports are cheaper encourages domestic consumers to buy imports. Makes it hard for exporters because they are relatively uncompetitive.

Higher consumer spending - If there is rapid growth in consumer spending. Tends to lead to an increase in imports causing a deuteriation in the current account.

Unbalanced economy - An economy focused on consumer spending rather than investments and exports tend to have a bigger current account deficit.

Competitiveness - Related to the exchange rate is the general competitiveness of firms. If there is a decline in relative competitiveness then it is harder to export causing a deterioration in the current account.

Question 20

What is the current account balance?

Answer 20

Balance of trade + Balance of invisible + Net money transfer and income from overseas assets.

Question 21

What is the difference between a current account deficit and a current account surplus?

Answer 21

A current account surplus is where exports are greater than imports, so the current account is positive. A current account deficit is where imports are greater than exports, so the current balance is negative.

Question 22

What are the negative impacts of a current account deficit?

Answer 22

BOP deficit may result in an increased level of unemployment as firms cannot compete with imports leads to lower growth of GDP higher deficit likely to result to a fall in the value of the currency in the long term deficit is usually a small percentage of GDP so small impact.