Balance Of Payments

Question 1

balance of payments

Answer 1

a record of all financial transactions between one country and those in the rest of the world

Question 2

current account

Answer 2

shows a country’s day to day transactions with other countries

Question 3

capital and financial account

Answer 3

long term investments and short term capital flows

Question 4

elements of the current account

Answer 4

trade in good balances- value of goods exported minus value of goods imported
trade in service balances- values of services exported minus those imported
investment income- income earned from assets owned overseas minus income paid to foreigners for assets owned in UK
current transfers- payment received from foreign institutions minus payments paid abroad

Question 5

elements of capital and financial account

Answer 5

FDI- investment from abroad minus investment by us to abroad
portfolio investment in shares and bonds- purchase of UK bonds minus purchase of foreign
short term capital flows- hot money flows in minus out
changes is foreign currency reserves

Question 6

causes of deficits on the current accounts

Answer 6

low productivity, relocation of manufacturing industries to cheaper countries like china, increase in exchange rate against other, continuous economic growth, so result in imports

Question 7

causes of surplus on current account

Answer 7

high productivity, decrease exchange rate, low economic growth, domestic industries

Question 8

reduce imbalance: expenditure reducing policies

Answer 8

designed to reduce aggregate demand, and reduce imports

Question 9

reduce imbalance: expenditure switching policies

Answer 9

designed to alter the pattern of expenditure between domestic and imported, include tariffs etc.

Question 10

reduce imbalance: supply side policies

Answer 10

cut in corporation tax, infrastructure spending, training and education, reduce NI contributions etc.

Question 11

global trade imbalances

Answer 11

occur where some countries have a large current account deficit, while other have a large surplus

Question 12

undesirable- current account deficit

Answer 12

may indicate the country has uncompetitive goods and services, increasing rate of unemployment, country may be forced to borrow foreign money, currency could depreciate

Question 13

current account deficit not too bad as

Answer 13

only a short run problem, can be financed easily by inflows into the financial account, caused by import of capital goods

Question 14

undesirable- current account surplus

Answer 14

can result in inflation, living standards may be falling as fewer goods available for domestic consumption, appreciate in currency, other countries might end up imposing import restrictions