Balance of Payments on the Current Account flashcards

Question 1

Define exports

Answer 1

Goods & services sold overseas

Question 2

Define imports

Answer 2

Goods and services bought overseas

Question 3

Define Balance of Payments

Answer 3

Record of all trascations relating to the international trade between one country and the rest of the world in 1 year

Question 4

Define Current account

Answer 4

A part of the balance of payments where all exports and imports are recorded

Question 5

Define Current balance

Answer 5

The difference between total exports and total imports

Question 6

Define Current Account Surplus

Answer 6

When value of exports exceeds value of imports (X>M)

Question 7

Define Current Account Deficit

Answer 7

When value of imports exceeds value of exports (M>X)

Question 8

Define Balance of trade

Answer 8

Difference between visible exports and visible imports

Question 9

Define invisible trade

Answer 9

Trade in services

Question 10

Define visible trade

Answer 10

Trade in physical goods

Question 11

Define primary income

Answer 11

Money recieved from the loan of production factors abroad

Question 12

Define secondary income

Answer 12

money transferred by the gov to and from overseas agencies

Question 13

Define Exchange rate

Answer 13

price of one currency in terms of another

Question 14

What occurs during a current account deficit?

Answer 14

M>X meaning money flowing out the country is greater than money flowing in and current balance becomes negative

Question 15

What occurs during a current account surplus?

Answer 15

X>M meaning money flowing into the country is greater than money flowing out and therefore, having a positive impact on the current account

Question 16

What is the relationship between the Current account and exchange rates?

Answer 16

If exchange rate appreciates, exports become more expensive and imports become cheap

This results in fewer exports being sold and more imports being bought having a negative impact on the current account

Question 17

What happens to the currency of a country during a current account surplus?

Answer 17

A country has a surplus on the current account as a result of rising sales of goods abroad hence demand for that country’s currency rises

This leads to an appreciation in the exchange rate

Question 18

What’s SPICED?

Answer 18

If exchange rate is high, imports become cheap and exports become expensive

If exchange rate is low, imports become expensive and exports become cheap

Question 19

What are reasons for deficits and surpluses on the current account?

Answer 19

Quality of Domestic Goods
Quality of Foreign Goods
Price of Domestic Goods
Price of Foriegn Goods
Exchange rate between countries

Question 20

How does leakages from the economy give a current account surplus / deficit

Answer 20

A current amount deficit suggests that a country’s becoming more dependent on imports meaning consumers buy goods produced outside the economy resulting in money flowing out of the economy

This represents a leakage from the economy. It means output and unemployment in the domestic economy are under threat

Question 21

How does inflation give a current account deficit

Answer 21

A current account deficit may be exposed to inflationary pressures meaning if prices of imports rise, it’ll be reflected in the general price level as CPI is calculated

Rising import prices result in higher domestic inflation levels. The greater the reliance on imports, the greater the threat of inflation when import prices rise

Question 22

How does low demand exports give a current account surplus / deficit

Answer 22

A current account deficit may not allow a country to sell goods & services abroad. If demand for exports is low, quality of goods is poor or price is too high.

A current account deficit may reflect structural weaknesses in the economy meaning domestic firms may struggle as they aren’t competitive in certain industries

Question 23

How does funding the deficit give a current account surplus / deficit

Answer 23

A current account deficit may need foreign currency to pay for the rising quantity of imports being bought. if the foreign currency reserves run low, it may be necessary to borrow

Persistent borrowing may cause long term problems.

A current account deficit can be financed by a capital account surplus; flows of a foreign currency can be attracted by a country if its interest rates are high

Question 24

How does pk give a current account surplus / deficit

Question 25

What are the impacts of a current account surplus?

Answer 25

Leakages from the economy
Inflation
Low demand exports
Funding the deficit

Question 26

Pros of exporting

Answer 26

Increase in demand
Increase in GDP
More job opportunities, Unemployment decreases
Export of culture
Strengthen currency

Question 27

Pros of importing

Answer 27

Improvement of living standards
Improvement in relationships between countries
Increased tax revenues
Increased consumer choice
Learn skills from other countries

Question 28

Cons of exporting

Answer 28

Demand pull inflation in the other country
Taxes may make the good more expensive

Question 29

Cons of importing

Answer 29

Loss of skills & industries
Possibility of weakness of currency