Balance of payments

Question 1

current account d

Answer 1

the part of the balance of payments that primarily records trade in goods and services

Question 2

capital account and financial account d

Answer 2

the part of the balance of payments that records capital flows in and out of the country

Question 3

current account deficit d

Answer 3

when imports of goods and services exceed exports

Question 4

current account surplus d

Answer 4

when exports of goods and service exceed imports

Question 5

balance of trade in goods d

Answer 5

visible exports minus visible imports

Question 6

balance of trade in services d

Answer 6

invisible exports minus invisible imports

Question 7

net income flows d

Answer 7

the difference between inward and outward flows of interest, profits and dividends

Question 8

why does the UK run a trade deficit

Answer 8

reduction in the size of our manufacturing sector

Question 9

what are examples of net income flows

Answer 9

interest

profits and dividends on UK assets from abroad

Question 10

net current transfers d

Answer 10

mainly government transfers to and from overseas organisations

Question 11

what does the financial account consist of

Answer 11

Net FDI
net portfolio investment (shares)
other capital flows (‘hot money’)

Question 12

what are short-term capital flows

Answer 12

period of time up to 1 year, speculating companies and wealthy individuals seeking quick profits (hot money)

Question 13

what are long-term capital flows

Answer 13

longer than a year, direct investment and portfolio investment flows (UK firm buy foreign subsidiary, government loan for 10 years)

Question 14

direct investment d

Answer 14

the acquisition of productive assets, for example, factories and offices

Question 15

portfolio investment d

Answer 15

the acquisition of financial assets, for example, shares and financial derivatives

Question 16

benefits of more international capital flows

Answer 16

growth of world trade
source of finance for firms (that would otherwise be unable to obtain finance)
FDI facilitates transfer of technology, information and best practice

Question 17

disadvantages of more international capital flows

Answer 17

difficulties in one sector of the financial system can affect the global financial system
FDI may lead to global dominance (of multinational firms)
‘hot money’ de-stabilises exchange rates

Question 18

how much employment does the financial services sector create in London

Answer 18

15 % of capital’s employment

Question 19

how much does the financial sector in London contribute to the economy

Answer 19

£75 billion

Question 20

what is the problem with running a deficit on the current account

Answer 20

suggests lack of competitiveness

exports are too expensive in overseas markets, while imports are relatively cheap

Question 21

expenditure-reducing policies d

Answer 21

policies used to correct current account imbalances by reducing consumer spending power

Question 22

expenditure-switching policies d

Answer 22

policies used to correct current account imbalances by encouraging consumers to buy domestically produced output rather than imports

Question 23

what expenditure-reducing policies can be used to balance the current account deficit

Answer 23

fiscal policy or monetary policy

Question 24

why are expenditure-reducing policies used

Answer 24

reduce the real spending power so people spend less on imports

Question 25

are expenditure-reducing policies long term solutions

Answer 25

no, because of their negative impact on growth and unemployment

Question 26

what expenditure-switching policies can be used to balance the current account deficit

Answer 26

direct controls (import controls)
devaluation of currency

Question 27

are direct controls on imports likely to be used to improve the deficit

Answer 27

no, because the WTO would intervene

Question 28

direct controls d

Answer 28

controls on imports, such as tariffs and quotas

Question 29

devaluation d

Answer 29

reducing the value of a currency in a fixed on semi-fixed exchange rate system

Question 30

depreciation d

Answer 30

in relation to currencies, reducing the value of a currency in a free-floating exchange rate system

Question 31

J-curve effect d

Answer 31

in the short-term, a devaluation or depreciation will lead to a deterioration of the current account before it starts to improve

Question 32

explain J-curve effect

Answer 32

initially Marshall-Lerner condition not met due to difficulty of changing contracts, but eventually it’s met and the current account improves

Question 33

negative effects of a current account surplus

Answer 33

leads to domestic inflation because a surplus is an injection to the circular flow (multiplier)

Question 34

policies to reduce a balance of payments surplus

Answer 34

reflation (fiscal or monetary)
removing controls on imports
revaluation (appreciation)

Question 35

When was the last time the UK had a current account surplus

Answer 35

1998