CH28 Balance of payments and the current account

Question 1

What is balance of payments?

Answer 1

The record of all transactions relation to international trade

Question 2

What is the current account?

Answer 2

Part of the balance of payments where all exports and imports are recorded

Question 3

What are exports?

Answer 3

Goods and services sold overseas

Question 4

What are imports?

Answer 4

Goods and services being bought from overseas

Question 5

What is a current account deficit?

Answer 5

When the value of imports outnumbers the ones of exports

Question 6

What is a current account surplus

Answer 6

When the value of exports outnumbers the ones for imports

Question 7

What is visible trade?

Answer 7

Buying and selling of physical goods

Question 8

What is invisible trade?

Answer 8

Involves the exchange/trade of services

Question 9

What is exchange rate?

Answer 9

Price of one currency compared to another

Question 10

What does it mean when a exchange rate appreciates?

Answer 10

The currency gets stronger and more valuable

Question 11

What does it mean when an exchange rate depreciates?

Answer 11

The currency gets weaker and is less valuable

Question 12

What happens when the exchange rate depreciates?

Answer 12

Price for the Domestic good goes down
Demand for the domestic good increases
Which leads to a current account surplus

Question 13

What happens when the exchange rate appreciates?

Answer 13

Price for the domestic good increases
Demand for the domestic good decreases
Which leads to a current account defecit

Question 14

How is quality of domestic goods a reason for a Current account surplus/ defecit?

Answer 14

If a country has a good reputation for its goods, it’s likely to enjoy higher demand and sales from overseas buyers. This will lead to an increase in the current account balance.

Question 15

How is quality of foreign goods a reason for a Current account surplus/ defecit?

Answer 15

if goods and services from overseas are seen as superior than to the ones produced domestically. Then demand for the foreign goods will increase for these imports, therefore this will lead to a decrease in the current account balance.

Question 16

How is price of domestic goods a reason for a Current account surplus/ defecit?

Answer 16

If the domestic good is more expensive than a foreign good, then demand for the domestic good will fall. Leading to a decrease in the current account balance.

Question 17

How is price of foreign goods a reason for a Current account surplus/ defecit?

Answer 17

If the foreign good is more expensive than the domestic good, demand for the domestic good would increase and the demand for the foreign good would decrease. Leading to an increase in the current account balance.

Question 18

What is the impact of a current acccount defecit on inflation?

Answer 18

The greater reliance on imports, the greater the threat of inflation when import prices rise

Question 19

What is the impact of a current account deficit on leakages from the economy?

Answer 19

A continuing current account deficit shows that a country relies heavily on imports. As a result, money goes out of the country, this represents output, and employment levels in the domestic economy are under threat.

Question 20

What is the impact of a current acccount defecit on lower demands for exports?

Answer 20

A current account defecit may show weakness in the economy. This means that domestic firms may struggle as they are not competitive in certain industries

Question 21

What is the impact of a current account defecit on exchange rate?

Answer 21

Results in a depreciation in exchange rate, making their currency less valuable