Balance Of Payments

Question 1

What is it

Answer 1

Set of accounts that records the transactions that take place between uK residents and the rest of the world

Question 2

What are the three major section

Answer 2

• transactions of goods and services (imports and exports)
• earnings of U.K. national employment overseas
• transfers of incomes, mostly between incomes

Question 3

UK macro economic objective

Answer 3

Stable balance of payments on current account

Question 4

Why is a stable balance of payments necessary for the U.K.

Answer 4

To ensure it earns sufficient foreign policy

Question 5

A stable and balanced balance of payments over time is a sign of…

Answer 5

A healthy economy that is competitive and able to sell sufficient goods and services overseas to pay for its imports

Question 6

Continued deficits on the current account of the balance of payments mean..

Answer 6

The UK earns less foreign current than it needs to finance its imports

Question 7

How can a shortfall of foreign currency be covered

Answer 7

By the UK selling assets overseas, but this reduces future earnings of foreign currencies from these assets and will thus reduce income from abroad in the future

Question 8

Why are continual surpluses on the current account of the balance of payments undesirable too

Answer 8

It indicates that the country is not using its reserves of foreign currency to enjoy fully the imports it can afford. Consequently welfare is unlikely to be maximised

Question 9

If one country has a surplus in their balance of payments

Answer 9

Others must have a deficit; they are likely to try and reduce this deficit which could reduce the volume of international trade- damaging the economic welfare of citizens in all countries concerned.

Question 10

In the third quarter of 2014 what was the U.Ks deficit

Answer 10

£27,010

Question 11

In the third quarter of 2014 what was Germany’s surplus

Answer 11

£18,550

Question 12

What are the three accounts

Answer 12

Current, capital and financial

Question 13

Why is the UK current account of the balance of payments often featured in the media

Answer 13

It measures the extent to which a country is able to pay for the resources it requires from overseas

Question 14

When does a current account deficit occur

Answer 14

When the outflows of currency on a country’s current account exceed the inflows over some period of time

Question 15

Since when has the UK been in a deficit

Answer 15

2000, significantly worsening after 2011

Question 16

What is a major cause of the deficit on the UKs current account

Answer 16

A dramatic decline in net investment or primary income (balance between income received by the U.K. from investment and income paid to foreign investors in the U.K.)

Question 17

Example of the uk’s poor investment that resulted in deficit

Answer 17

Investment in the 19 eurozone countries where returns have been low, as these countries have performed very poorly over the last few years.

Question 18

Internal factors that determine the balance of payments

Answer 18

Productivity (high export sales- boost trade balance & cost effective = consumers prefer domestic goods).

Macro economic performance (Keynes = high GDP = high imports) but also attracts FDI.

Exchange rate

Question 19

How does a rise in the exchange rate affect a current account

Answer 19

Buyers need more of their domestic currency to purchase from the UK, sales fall worsening the current account

Question 20

Germany current account surplus example

Answer 20

Surplus of 6% of GDP

High rates of productivity, with its rate of multi factor productivity rising 2% p/a

Question 21

How a low exchange rate affects investment

Answer 21

Overseas investors require less of their domestic currency to invest in the U.K.- encouraging inward investment and improving the current account in the long term

Question 22

How low inflation improves the current account

Answer 22

Low inflation increases competitiveness, also for domestic producers against imports

Question 23

External factors affecting the current account

Answer 23

Low rates of inflation in other economies weakens the current account because they lose export sales and import penetration increases.
Other economies doing well= increase investment and consumption.
Foreign policies also affect - trade.