Balance of payments

Question 1

What is the balance of payments?

Answer 1

record of a country’s transactions with the rest of the world

Question 2

When do we have a current account surplus?

Answer 2

When exports is greater than imports

Question 3

When do we have a current account deficit?

Answer 3

When imports are greater than exports

Question 4

What is the current account?

Answer 4

all payments for trades in goods and services plus income flow

Question 5

State the 4 components in the current account

Answer 5

• Balance of trades in goods
• Balance of trades in services
• Primary income flows (wages and investment income)
• Secondary income flows (government transfers to UN,EU)

Question 6

Examples of primary income

Answer 6

Wages - UK companies paying workers abroad (debit on current account)

Investment income - Income recieved from foreign direct investment (FDI) e.g BP earing from operation in Indai (credit to current account)

Question 7

What is meant by secondary income?

Answer 7

transaction representing “something for nothing” - UK payments to the EU, remittances

Question 8

What is meant by remittances?

Answer 8

Sum of money sent as a payment or a gift - leaves a big debit on UK’s current account

Question 9

How may consumer spending/economic growth affect the balance of payments?

Answer 9

High consumer spending leads to higher spending on imports.

Question 10

How may exchange rates affect the balacne of payments?

Answer 10

SPICED and WPIDEC

Fall in the pound makes exports more competitve and less consumers will import - Helping the current account deficit. However, demand for goods will have to be relatively price elastic