Balance of Payments Flashcards
Balance of Payments
The Balance of Payments is a record of payments between one country and the rest of the world.
Current Account
The Current Account is part of the Balance of Payments. It measures trade in goods, trade in services, investment income and current transfers.
Which of the following shows the impact on the UK Current Account of a UK consumer buying a product for £100 from America?
Imports are a withdrawal as they involve money leaving the circular flow of income to pay for goods and services abroad. Since money leaves the circular flow, this is recorded as a negative £100 on the current account.
Which of the following shows the impact on the UK Current Account of a UK bank selling £2400 of financial services to Germany?
Exports are an injection as they involve money from abroad entering the circular flow of income in exchange for British goods and services. Since money enters the circular flow, this is recorded as a positive on the current account.
current transfers
Current transfers are when money is transferred abroad without getting any goods or services back in exchange. Common examples are aid which is sent abroad and workers wages which are sent back home (called remittances).
Balance of Payments
The Balance of Payments is a record of payments between one country and the rest of the world.
Current Account
The Current Account is part of the Balance of Payments. It measures trade in goods, trade in services, investment income and current transfers.
Spain’s inflation rate is 9% and Greece’s inflation rate is 2%. What is the impact of these different inflation rates on Spain’s Current Account?
Spain’s high inflation rate means that their exports are comparatively more expensive than Greek exports. Therefore, fewer foreign consumers will choose to buy Spanish exports. This means that demand for Spanish exports will fall and so export revenue for Spain will decrease. This will worsen (decrease) their current account.
Which of the following combinations of economic changes is most likely to result in a Current Account surplus?
A decrease in inflation will make UK products cheaper. This means that UK consumers are more likely to purchase UK products and less likely to import, so import expenditure will fall. It also means that UK exports will appear cheaper, meaning export expenditure will likely increase.
A decrease in consumption in the UK will usually mean that UK consumers are demanding fewer imports. It may also reduce inflation further, which will have the effect described above.
An increase in export revenue and a reduction in import expenditure will improve the trade balance - it will increase. The trade balance is the largest part of the current account and so an improvement in the trade balance is likely to lead to a Current Account surplus.
The Consumer Price Index in the UK increases by 2% and retail spending in the UK has increased by 6%. Ceteris paribus, what is the most likely impact on the UK Balance of Payments?
A worsening of the Current Account
CPI is a measure of inflation, so the general price level has increased. An increase in inflation means that UK exports will be increasing in price relative to those from other countries. This will likely lead to a decrease in demand for these exports, causing export revenue to fall.
An increase in consumer spending is likely to mean an increase in spending on imports and so import expenditure will rise. This will reduce the trade balance and worsen the Current Account.
Which of the following is true for a country with higher production costs?
Higher export prices will decrease export revenue, worsening the current account
the five factors that can affect a country’s current account.
- Exchange rates
- relative inflation
- costs
- quality
- income
What would a UK consumer purchasing a house in France be counted as
the Capital & Financial Account in the UK Balance of Payments
What would a French tourist hiring a tour guide in Manchester be counted as
a positive in the Trade in Services section of the UK Current Account
This involves money flowing into the UK economy, so this is an export for the UK and will be recorded as a positive in the UK Current Account. Hiring a tour guide is classed as a service rather than a good.
Which of the following is likely to occur in the UK Current Account following a depreciation of the pound?
A depreciation (a weaker pound) will make imports more expensive and exports cheaper (the opposite of SPICEE - WPIEEC is less catchy!). UK consumers will demand fewer imports, so import expenditure will decrease. Foreign consumers will demand more UK exports, so export revenue will increase.
A decrease in import expenditure and an increase in export revenue will improve the current account.
