Balance Of Payments

Question 1

What is the current account?

Answer 1

Part of the BoP that primarily records trade in goods and services

Question 2

What is the capital account?

Answer 2

The sending back of financial capital to ‘home’ countries from people entering+leaving the UK (repatriation)
PLUS Gov transfers such as foreign aid

Question 3

What is the financial account?

Answer 3

Records the majority of flows of financial capital into and out of the country

Question 4

What are international capital flows?

Answer 4

The movement of money for the purpose of investment, trade or business production.
E.g investment capital; capital spending on operations; research+development

Question 5

What are the 4 components of the current account?

Answer 5

1. Trade in goods= visible exports-visible imports
2. Trade in services= invisible x-m
3. Net flow of investment income= income flows from using factors of production overseas
4. Transfers of money= Gov transfers to+from overseas organisations e.g payments to EU

Question 6

What are the 3 components of the financial account?

Answer 6

1. FDI= net acquisition of productive assets by UK firms overseas+foreign firms in UK
   e. g Dyson buying plant in Malaysia
2. Net Portfolio Investment= purchase of financial assets (e.g shares) rather than physical assets
3. Short-term capital movement= hot money

Question 7

What are the differences between short-term and long-term capital flows?

Answer 7

Short-term=
•largest component of international capital flows
•companies, banks+wealthy individuals investing in different countries (hot money)

Long-term=
•divisible into direct investment+portfolio
•lasts for longer than a year

Question 8

Benefits of international capital flows?

Answer 8

1. Promotes growth of world trade
2. Generates source of income firms may not be able to obtain within their own country
3. FDI facilities transfer of technology, info+efficiency= imported supply-side

Question 9

Problems with international capital flows?

Answer 9

1. Difficulties in financial system can be Globally detrimental e.g US housing+credit crunch
2. FDI could lead to global dominance of multinational firms
3. Hot money could destabilise exch rate

Question 10

Policies to reduce a deficit?

3 Ds

Answer 10

Expenditure-reducing= reducing AD for goods+services
•deflation by either contractionary fiscal or monetary

Expenditure-switching= encouraging consumers to switch to domestic goods
•direct controls (protectionism)
•devaluation

Question 11

Current account deficit as a problem

Answer 11

• uncompetitiveness as lower GDP in the long-term
• if capital/financial flows dry up= depreciation of the exch rate
• unbalanced economy? Structural weakness

Question 12

Current account deficit not a problem

Answer 12

• globalisation= exports are cheaper so more internationally attractive
• in a floating exch rate it should solve itself
• if deficit is financed by long-term capital inflows, can be beneficial to economy in long-term as improves productive capacity

Question 13

Definition of BoP?

Answer 13

A record of the financial transaction over a period of time between a country and its trading partners