Balance Of Payments

Question 1

What does he BOP record

Answer 1

All financial transactions made between consumers, businesses and the government in one country with other nations

Question 2

What is a positive entry into the BOP

Answer 2

Inflows of foreign currency e.g. exports sold overseas

Question 3

What is a negative entry into the BOP

Answer 3

Outflows of foreign currency e.g. imported goods and services

Question 4

What does the current account of the BOP compromise

Answer 4

The balance of trade in goods and services plus net investment incomes from overseas assets and net transfers

Question 5

What does the trade balance in services include

Answer 5

Banking, insurance, tourism, education etc

Question 6

What are net money transfers

Answer 6

Overseas aid / debt relief

Question 7

What items are on the current account of the balance of payments

Answer 7

• trade balance in goods
• trade balance in services
• net money transfers
• net investment income from overseas assets

Question 8

What does it mean if a country is running a deficit in the current account

Answer 8

There is a net outflow of demand and income from the circular flow

Question 9

UK trade in services

Answer 9

The UK runs a large trade surplus in services. Net exports of business and financial services are strong as is the sale of creative service. Britain runs a trade deficit in travel and tourism.

Question 10

What does a current account deficit mean

Answer 10

A country is not paying its way in the global economy - there is a net outflow of demand from the circular flow of income and spending.

Question 11

Does the current account have to balance

Answer 11

No

Question 12

Why doesn’t the current account have to balance

Answer 12

Because the balance of payments also includes the capital account

Question 13

What does the capital account track

Answer 13

Capital flows in and out of a country. Including portfolio capital flows and direct capital flows arising from foreign investment investment

Question 14

What needs to happen if a country if running a current account deficit

Answer 14

They need to balance it with a surplus on the capital account - achieved by measures to attract inflows of capital from other countries

Question 15

What are the main causes of a current account deficit

Answer 15

• poor price and non-price competitiveness
• strong XR affecting exports and imports
• recession in one or more major trade partner countries
• volatile global prices e.g. commodities

Question 16

How does a strong XR create a current account deficit

Answer 16

A high currency value increases the price of exports in overseas markets.
Appreciating currents also makes imports cheaper causing domestic consumers to switch their spending towards cheaper imported products.

Question 17

Economic policies to reduce a trade deficit

Answer 17

• demand management
• currency adjustment
• supply-side improvements
• protectionist measures

Question 18

What is demand management

Answer 18

A tightening of fiscal and / or monetary policy reduces real spending power of consumers and leads to lower spending on imports (improves trade balance)

Question 19

What is currency adjustment

Answer 19

Lower XR reduces the foreign price of exports and makes imports more expensive - causes changes in demand

Question 20

What are supply side improvements

Answer 20

• policies to raise labour productivity and new businesses

- investment in human capital to boost productive capacity and competitiveness

Question 21

What are protectionist measures

Answer 21

Such as import quotas, tariffs

Question 22

UK and protectionist measures

Answer 22

The UK is limited by global trade agreements and cannot impose tariffs unilateralist to improve their trade

Question 23

What is external competitiveness

Answer 23

The ability to sell goods and services at competitive prices in a foreign country

Question 24

What is cost competitiveness

Answer 24

Differences in unit labour costs - reflected in producer prices

Question 25

What is non-price competitiveness

Answer 25

E.g. product quality, design, branding

Question 26

What are non-wage costs

Answer 26

• costs of meeting environmental / health regulations
• environmental taxes
• employment protection laws
• requirements to provide pensions for employees