Balance of Payments

Question 1

Balance of Payments def.

Answer 1

Record of a country’s financial transactions with the rest of the world

Question 2

4 Components of the Balance of Payments

Answer 2

Trade Balance - Imports and Exports of physical goods. the UK has had a trade balance deficit since the 70s.

Current Account (G&S) and the Capital & Financial Account

Question 3

4 main macro objectives

Answer 3

Low unemployment
Low inflation (2%)
Steady growth
Long term current account equilibrium on the Balance of Payments

Question 4

Why the UK chronic Current Account deficit isn’t too important
3

Answer 4

The deficit is a small percentage of GDP

Current account isn’t the main determining of UK overseas debt. The value of UK net assets abroad is positive (UK owned assets abroad exceed foreign owned assets in the UK) and far exceeds the current account deficit

UK is successful at attracting foreign direct investment, helping to finance the Capital & Financial account of the balance of payments

Question 5

2 Aspects of Globalisation

Answer 5

International trade has been growing much faster than world GDP, meaning it is becoming more important for GDP. e.g. The UK exports 25% of its GDP, so is very dependant on foreign nations

Businesses & people are internationally mobile. UK firms own many others abroad, whilst many sectors in the UK rely on migrants (NHS & Hospitality)

Question 6

The Capital & Financial Account

Answer 6

part of the Current Account where movements of capital between countries is recorded

Long Term Capital Flows - Includes foreign direct investment (a business setting up businesses abroad) and LT lending and borrowing abroad by Banks

Short term Capital Flows - Speculative buying or selling of currencies that are expected to rise or fall in value (ForEx)

Capital inflows are Credit items, capital outflows are Debit items