Balance of Payments (Deficit+Surpluses+Influences)

Question 1

Define Balance of Payments

Answer 1

statement of all financial transactions between UK&ROW (current, capital, financial accounts)

Question 2

Define Current account

Answer 2

statement transactions of balance of trade, net income from abroad and net current transfers

Question 3

Define Balance of trade

Answer 3

major component of current account, measures net exports (exports value – imports value)

Question 4

Define Trade deficit

Answer 4

sometimes called trade gap, import value > export value, = to –ve net export figure

Question 5

Define trade surplus

Answer 5

import value < export value, = to +ve net export figure

Question 6

Define exports

Answer 6

goods and services sold to foreign countries, +ve on balance of payments, inflow of money

Question 7

Define imports

Answer 7

goods and services bought from foreign countries, -ve on balance of payments, outflow of money

Question 8

UK has a ____ of services but a ____ of goods

Answer 8

UK has a surplus of services but a deficit of goods

UK has a current account deficit

Question 9

Pro and con of current account deficit

Answer 9

increase living standards of citizens, but decrease in money supply

Question 10

Pro and con of current account surplus

Answer 10

increase in money supply, decrease in living standards

Question 11

Factors causing current account deficit

Answer 11

High rate of consumer spending on imports (during economic boom)
Decline in international competitiveness making countries exports less competitive
Overvalued exchange rates which makes exports relatively more expensive

Question 12

Name three factors affecting the current account

Answer 12

Consumer spending, exchange rate, competitiveness

Question 13

Explain how Economic growth/consumer spending affects the current account

Answer 13

A period of consumer led economic growth will cause a deterioration in the current account. Higher consumer spending will lead to higher spending on imports. A country with a low savings rate and high % of consumption will typically have a higher current account deficit.

Question 14

Explain how the exchange rate affects the current account

Answer 14

A depreciation in the exchange rate makes the currency relatively more competitive. After a depreciation, exports will be more competitive and imports more expensive. This should improve the current account. However, it requires demand for exports and imports to be relatively price elastic. If demand is inelastic, then cheaper exports will only cause a small rise in demand. The actual value of exports can decrease.

Question 15

Explain how the competitiveness of a country affects the current account

Answer 15

In the long term, the current account will be influenced by the relative competitiveness of their industrial production. If a country becomes uncompetitive then exports will decline relative to imports.

Question 16

Components of current account

Answer 16

Visibles (trade in goods) e.g. raw materials
Invisibles (trade in services) e.g. tourism and travel
Overseas income e.g. abroad assets
Current transfers e.g. aid - transfers money to but no money back

Question 17

Overall the balance of payments must balance e.g. a current account deficit must be matched by

Answer 17

an equivalent amount of foreign capital entering the UK or by borrowing form other countries

Question 18

Positive and negative of current account deficit

Answer 18

Increase living standards of citizens

Decrease in the money supply - deflationary pressure

Question 19

Positive and negative of current account surplus

Answer 19

Increase in money supply

Decrease in living standards - inflationary pressure

Question 20

The circular flow of income

Answer 20

Firms - goods and services
Households - factors of production (labour land capital enterprise)
Incomes (wages, rent, interest)
Expenditure

savings — banks — investments
tax — government — gov spending
imports — foreign trade sector — exports

Question 21

Economists maintain that there are three possible ways of measuring this flow with each way looking at a different part of the circular flow of income, what area the three ways

Answer 21

The output method (total amount of goods and services produced in one year)
The expenditure method (the total amount of domestic spending by consumers, firms, government and foreigners)
The income method (the total income earned by the factors of production involved in the production of goods and services in one year)

Question 22

An economy is in equilibrium when

Answer 22

the rate of injections = the rate of withdrawals from the circular flow

Question 23

A current account surplus

Answer 23

means there is a net inflow of money into the circular flow of income

Question 24

During a recession, the current account deficit…

Answer 24

falls because consumer spending falls

Question 25

During periods of economic growth…

Answer 25

consumers have higher incomes so consume more so deficit increases

Question 26

The sum of all countries trade balances should be

Answer 26

zero since what one country exports will be imported by another country

Question 27

International trade means countries have become

Answer 27

interdependent therefore the economic conditions in one country affect another since the quantity they export or import will change

Question 28

If the EU faces an economic downturn then

Answer 28

demand for UK goods and services will fall as the EU is the UK’s main export market and consumers in the EU are less able to afford imports

Question 29

Government target

Answer 29

Current account equilibrium

Question 30

What influences balance of trade

Answer 30

exchange rate

SPICE

Question 31

Sustained current account surplus pros and cons

Answer 31

China, Germany
Pros: saves money for future international investments
Cons: deficit in financial crisis, lower standards of living

Question 32

Sustained current account deficit pros and cons

Answer 32

UK
Pros: higher standards of living
Cons: credit crunch from overseas investment if poorer countries like Argentina in 1980 - no credit given