balance of payments 4.1.7

Question 1

what is the balance of payments made up of

Answer 1

current account

capital and financial

Question 2

current account

Answer 2

trade in goods, services, income and current transfers

Question 3

capital account

Answer 3

transfers of immigrants and emigrants taking money abroad or bringing to the UK

Question 4

financial account

Answer 4

FDI

portfolio investment

Question 5

FDI

Answer 5

the net investment from abroad eg the a UK firm building a factory Japan would be an outflow

Question 6

what does balance of payments show

Answer 6

inflows and outflows of money

Question 7

portfolio investment

Answer 7

people/ businesses from one country buy shares or bonds etc in other nations

Question 8

how are global imbalances measured

Answer 8

imbalances on the current account

imbalances in the assets owned abroad/ borrowing owned abroad

Question 9

short term causes of deficits and surpluses

Answer 9

high levels of consumer demand
strong exchange rate
relative inflation

Question 10

how can high levels of consumer demand/strong exchange rates/ high levels of relative inflation result in an imbalance

Answer 10

consumer demand: if demand increases and supply of goods doesn’t, the only way to meet demand is by increasing imports- UK consumers have high income elasticity of demand for imports so the deficit grows in periods of consumption
exchange rate: strong exchange rate reduces UK price of imports, leads to an expenditure switching effect
inflation: high levels decrease exports since prices increase compared to goods in other countries

Question 11

medium causes

Answer 11

country loses comparative advantage, people transfer purchases to other countries, the UK would need to switch to production of other things

Question 12

long term causes of an imbalance

Answer 12

lack of capital investment: out of date tech=less productivity
deindustrialisation: decrease in importance of industry + manufacturing in an economy makes it harder to export (services harder to export)
countries with smaller populations and larger amounts of natural resources have a larger surplus
countries with corruption find it more difficult to set up a business & export

Question 13

demand side policies to reduce imbalance

Answer 13

monetary/ fiscal policy to reduce AD- reduces income and demand for imports
short term and limits output of the economy causing a reduction in living standards and growth

Question 14

supply side policies to reduce imbalance

Answer 14

improve productivity & efficiency or improve quality
exploit opportunities in export market overseas and focus resources on industries where the UK has a real comparative advantage, accepting some industries should close but this will be politically unpopular, causes job losses in the short term

Question 15

expenditure switching policies

Answer 15

tariffs/ quotas reduce the attractiveness of imports but cause trade wars which would worsen the deficit