Balance of Payments

Question 1

Define balance of payments

Answer 1

Balance of payments- record of payments between 1 country & 🌎- comprises of current, financial & capital accounts

Question 2

What is the current account?

Answer 2

Current account- record trade in 🚘 & 🧹, investment income & current transfers- most significant element of balance of payments

Question 3

What is trade in goods?

Answer 3

Trade in 🚘- measures movement of tangible (touchable) products across international borders- e.g. 🇬🇧 exports 🚙 & imports food 🍎 & oil⛽️

Question 4

What is trade in services?

Answer 4

Trade in 🧹- measures movement of intangible (untouchable) output- e.g. 🇬🇧 exports banking 💰 services & imports foreign holidays✈️ 🌞

Question 5

What is investment income?

Answer 5

Investment income- rewards for investment in foreign countries in the form of interest, profit & dividends

Question 6

What are current transfers?

Answer 6

Current transfers- payment of 💵 across international 🌎 borders with ✖️ corresponding output (✖️ corresponding trade of 🚘/🧹) e.g. migrants send 💵 back to families in another country, tax

Question 7

What is a current account surplus?

Answer 7

Current account surplus- ⬆️ exports (⬆️ inflow of 💵) & ⬇️ imports (⬇️ outflow of 💵)

Question 8

What is a current account deficit?

Answer 8

Current account deficit- ⬆️ imports (⬆️ outflow of 💵) & ⬇️ exports (⬇️ inflow of 💵)

Question 9

What is the financial account?

Answer 9

Financial account- records 💵 flows for investment purposes e.g. FDI (buying assists & owning companies in other countries) & foreign portfolio investment

Question 10

What is the capital account?

Answer 10

Capital account- records changes in net assets in each country & errors- puts the 2 other accounts in balance

Question 11

What is relationship between the current account & the interest/exchange rate?

Answer 11

If interest rate ⬆️ then exchange rate/value of 💴 also ⬆️-> worse balance of payments in long run as exports expensive (⬇️) & imports cheaper (⬆️)
If interest rate ⬇️ then exchange rate/value of 💴 also ⬇️-> better balance of payments in long run as exports cheaper (⬆️) & imports expensive (⬇️)

Question 12

Is a balance of payments deficit always a problem?

Answer 12

Balance of payments deficit ✖️ problem if it can be funded- sign that living standards ⬆️

Question 13

When is a balance of payments deficit a problem?

Answer 13

BUT problem when reserves of foreign currencies ⬇️- because foreign 💴 reserves being used to purchase imports:

• Potential ⬇️ in 💴 value as you sell your own 💴 in EXCHANGE for ⬆️ foreign 💴
• ALSO demand for your 💴 low as you are exporting very little
• Country becoming uncompetitive (costs ⬆️ relative to trading partners)-> unemployment-> economic growth slowdown

Question 14

What is international trade interdependence?

Answer 14

Countries rely on each other for income (exports) & for resources (🚘/🧹 via imports)

Question 15

What is a negative of international trade interdependence?

Answer 15

Weak demand in one area effects other countries due to interdependence

Question 16

When is interdependence a problem?

Answer 16

Interdependence PROBLEM when current account deficit/surplus persistent (heavily reliant on imports or exports)- current account imbalance- caused by state in business cycle, strength of 💴
- If demand fails then export industry suffers
- If supply fails then imports suffer

Question 17

What is an example of a current account deficit?

Answer 17

DEFICIT EXAMPLE- 🇬🇧 manufacturing sector competitiveness lost to Far East (🇨🇳)- cheaper factors of production e.g. labour, land etc … takes time to adjust to ⬇️ costs & meanwhile 🇬🇧 in deficit (import reliant)

Question 18

When is a current account imbalance significant?

Answer 18

Current account imbalance SIGNIFICANT when unsustainable (present needs met but at cost of future generations)

Question 19

What are the effects of persistent current account deficits?

Answer 19

Persistent deficits = 💴 value ⬇️- net incomes leave country-> import reliance means demand for domestic goods ⬇️-> domestic firms laying off workers- MPC sees as a ➕ as ⬇️ demand ⬇️ chances of inflation

Question 20

What are the effects of persistent current account surpluses?

Answer 20

Persistent surpluses = 💴 value ⬆️- net income enter country-> export reliance means demand for domestic goods ⬆️-> domestic firms employ ⬆️ workers- MPC sees as a ➖ as ⬆️ demand ⬆️ chances of inflation

Question 21

How may a decrease in the value of the currency restore competitiveness?

Answer 21

⬇️ in 💴 may restore competitiveness as imports expensive (… 🚘 of other countries seem ⬆️ expensive) & country’s exports cheaper-> ⬆️ demand for country’s exports