Balance of Payments

Question 1

balance of payments

Answer 1

measure of trade and our exports & imports

records all financial transactions made between C, P, B, G in one country with all other nations

inflows of foreign currency = + entry (export)
outflows of foreign currency = - entry

Question 2

BoP current account

Answer 2

• trade balance in goods ~ raw materials, tech, energy products
• trade balance in services ~ banking, insurance, education
• net money transfers ~ overseas aid/debt relief & private money transfers
• net investment income from overseas assets ~ profits, interest & dividends from investments in other countries

Question 3

cause of current account deficit: poor price & non price competitiveness
(quality/service)

Answer 3

• higher inflation than trading partners
• low levels of capital investment and research
• weakness in design and branding

Question 4

cause of current account deficit : strong exchange rate affecting exports and imports

Answer 4

• high currency value increased prices of exports

- appreciating currency also makes imports cheaper

Question 5

cause of current account deficit : volatile global prices in commodities

Answer 5

• exporters of primary commodities might be hit by a fall in world prices
• importing nations could be hit by higher prices for oil and gas

Question 6

economic problems from persistent trade deficits

Answer 6

• loss of aggregate demand ~ causes slower real GDP growth and reduced living standards
• loss of jobs in home based industries ~ contribute to regional decline and structural unemployment problems
• currency weakness and higher inflation and a country may run short of vital foreign currency reserves
• trade deficit ~ reflection of lack of competitiveness / supply side weakness

Question 7

economic policies to reduce trade deficit : demand management

• quick
• unpopular as makes you poorer

Answer 7

• tightening of FP/MP ~ higher taxes and IR reduces real spending power of consumers
• leads to lower spending on imports ~ improve trade balance
• lower exchange rate reduces foreign price of exports and makes imports more expensive

Question 8

economic policies to reduce trade deficit : supply side improvement

• effective
• slow

Answer 8

• policies to raise labour productivity and encourage start ups with export potential ~ tech
• investment in human capital to boost productive capacity & competitiveness in high value industries

Question 9

economic policies to reduce trade deficit : protectionist measures

• value of imports decrease
• others will do same ~ everyone poorer

Answer 9

• quotas ~ restrict quantity

- tariffs ~ tax on imports