Balance of payments 4.1.7

Question 1

What is the Balance of payments

Answer 1

A record of transactions between one country and the rest of the world

Question 2

What are the 2 components of the balance of payments

Answer 2

Current account
Capital & Financial account

Question 3

What is a Current Account Surplus

Answer 3

When the current account is positive more money is entering the economy than leaving

Question 4

What is a Current Account Deficit

Answer 4

When the current account is negative more money is leaving the economy than entering

Question 5

What 6 factors affect the current account

Answer 5

Exchange Rates
Relative Inflation
Productivity and costs
Quality
Growth
Protectionism

Question 6

How does relative inflation affect the current account

Answer 6

If a country’s inflation rate is low its exports will become cheaper so foreign consumers will buy more of its exports export revenue will increase which will improve the current account.

Question 7

What are the impacts of a current account deficit on AD

Answer 7

A current account deficit implies Import expenditure is greater than export revenue causing AD to decrease, Real GDP decreases, Lower living standards and employment

Question 8

What are the impacts of a current account deficit on AD

Answer 8

A current deficit implies Import expenditure is greater than export revenue causing an increase in the supply of £ and a decreased demand for £ causing a depreciation of the £

Question 9

What are the impacts of a current account surplus on AD

Answer 9

A current account deficit implies Import expenditure is less than export revenue causing AD to increase, Real GDP increases, Increased living standards and employment

Question 10

What 4 methods are used to reduce imbalances on the current account

Answer 10

Expenditure-Reducing Policies
Trade barriers
Lower Interest Rates
Supply-Side Policies

Question 11

Define Expenditure-Reducing Policies

Answer 11

Increasing income tax or decrease benefits reduce consumption, which will reduce expenditure on imports

Question 12

Define Expenditure-switching Policies

Answer 12

Policies that get consumers to switch from buying imports to domestic goods

Question 13

How will trade barriers switch expenditure

Answer 13

Tariffs make imports more expensive leading to decreased import expenditure resulting in a decrease in the current account deficit

Question 14

How will Lower interest Rates switch expenditure

Answer 14

Lower interest rates causes investors to sell their £ causing an increase in the supply of £ leading to a depreciation making imports more expensive

Question 15

What supply side policies are used to reduce imbalances on the current account deficit

Answer 15

Reducing corporation tax
Increasing government spending
Reducing minimum wage

Question 16

How will supply side policies reduce imbalances on the current account deficit

Answer 16

Supply side policies increase AS, decreasing price level, making domestic goods cheaper and more competitive, leading to an increased demand for exports