Balance of Payments

Question 1

What does the balance of payments record?

Answer 1

ALL financial transactions between the UK and the rest of the world.

Question 2

What does the BoP tell us?

Answer 2

It tells us how much is being spent by British consumers and firms on imported goods and services; and how successful UK firms have been in exporting to other countries & markets.

Question 3

What does the current account measure?

Answer 3

Measures income generated in the year in question flowing into and out of the economy.

Question 4

How is the current account calculated?

Answer 4

Exports - Imports + Investment flow

Question 5

What is the current account made up of?

Answer 5

• Trade in goods
• Trade in services
• NET flow of investment income from the UK overseas assets
• Transfer of money between people and governments.

Question 6

List the UK’s main exports.

Answer 6

• Tourism
• Financial services
• Cars
• Jewelry
• Petroleum products
• Communications
• Music and entertainment

Question 7

List the UK’s main imports.

Answer 7

• Oil
• Food
• Gas
• Textiles
• Cars

Question 8

Define the current account equilibrium.

Answer 8

When the money value of exports more or less equals the value of imports over a period of time.

Question 9

Define the balance of trade.

Answer 9

The main part of the current account consisting of the balance of trade in goods and the balance of trade in services.

Question 10

What two accounts is the BoP made up of?

Answer 10

• Current account

- Capital and financial account

Question 11

What is the capital financial account?

Answer 11

The capital account measures the net flows of different forms of capital between nations.

Measures using:

• Sale of UK assets
• Investment of hot money invested into the UK

Question 12

What is ‘hot money’?

Answer 12

Capital which is frequently transferred between financial institutions in an attempt to maximize interest or capital gain.

Question 13

What do we use the money from the capital and financial account for?

Answer 13

To cover the debt of the current account.

Question 14

What impact does importing have on UK consumers?

Answer 14

• Marginal propensity to consume increases
• Better quality products
• Greater consumer choice

Question 15

What impact does importing have on UK firms?

Answer 15

• Demand for products decreases because consumers can find them cheaper elsewhere
• Some firms may close/become bankrupt
• Cheaper imports. Lower costs & therefore inflation drops, resulting in economic growth
• Costs are decreased so raw materials become cheaper
• Greater unemployment

Question 16

What is remittance?

Which account does this impact?

Answer 16

A sum of money sent as a gift/care by UK workers to those at home (usually in foreign countries)

This is included in the current account.

Question 17

Give two advantages of the UK current account deficit.

Answer 17

• Weak currency (resulting in cheap exports)
• Employment increases
• Can be financed by C/F account

Question 18

Give two disadvantages of the UK current account deficit.

Answer 18

• Greater amount of imports
• Job losses
• Weak currency (means it is expensive to import necessities such as oil)
• Inflation rises
• Economic slow down

Question 19

What is redistribution of income?

Answer 19

Taxing people and spending the money on everyone. (i.e. the government spending the money on the NHS/healthcare or education.)