Balance of Payments

Question 1

What is a Balance of Payments?

Answer 1

• Is a record of a countries transactions with the rest of the world - Shows receipts from trade - Consists of the Current and Financial Account

Question 2

What is the current account?

Answer 2

• Is a record of all payments for trade in goods and services plus income flow.

Question 3

How many parts is the current account split into?

Answer 3

4

Question 4

What are the 4 parts of the Current Account?

Answer 4

• Balance of trade in goods (Visible) - Balance of trade in services (Invisible) Eg. Tourism & Insurance - Net income flows, primary income flows (wages & investment income) - Net Current Transfers, secondary income flows (eg. government transfers to UN & EU)

Question 5

What is the financial account?

Answer 5

• Record of transfers for financial investment

Question 6

What kind of investment does the Financial Account include?

Answer 6

•Direct investment - This is net investment from abroad. For example, if a UK firm built a factory in Japan it would be a debit item on UK financial account. •Portfolio investment. These are financial flows, such as the purchase of bonds, gilts or saving in banks. They include •short-term monetary flows known as “hot money flows” to take advantage of exchange rate changes, e.g. foreign investor saving money in a UK bank to take advantage of better interest rates – will be a credit item on financial account.

Question 7

What is the Capital Account?

Answer 7

• Is the transfer of funds associated with buying fixed assets such as land.

Question 8

What is a Balancing Item?

Answer 8

• When statistics are compiled there are likely to be errors, therefore, the balancing item allows for these statistical discrepancies.

Question 9

Example of a Balance of Payments.

Answer 9

Question 10

Factors that affect the balance of payments.

Answer 10

• The high rate of consumer spending on imports (during an economic boom) – this will cause deficit.
• Decline in international competitiveness making countries exports less competitive and imports more attractive.
• Overvalued exchange rates which make exports relatively more expensive.
• Structure of economy – deindustrialisation can harm export sector.

Question 11

Does the Current Account Deficit increase or decrease after a period of economic growth?

Answer 11

• INCREASES

Question 12

Why does the Current Account deficit increase after economic growth?

Answer 12

• Because higher economic growth leads to higher consumer spending and therefore more spending on imports.

Question 13

Why during an economic downturn does the current account deficit decrease?

Answer 13

Because there is less money coming in so people spend less on imports.