CH36 Balance of payments

Question 1

How are economies interconnected?

Answer 1

through international trade

Question 2

The balance of payments accounts are split into what?

Answer 2

into two main parts

Question 3

What must the balance of payments accounts always be?

Answer 3

they must always be balanced

Question 4

What are the 4 keys ways in which the process of globalisation has been taking place?

Answer 4

1- the proportion of output of an individual nation economy which is traded internationally is growing
2-there is ever-increasing ownership of physical and financial assets, such as companies or shares or loans in one country by economic actors in another country
3-individuals are migrating in increasing numbers from one country to another
4-technology is being shared between countries on a faster basis

Question 5

What is the balance of payments account?

Answer 5

it is a record of all financial dealings over a period of time between economic agents of one country and all other countries

Question 6

what are the 2 components in which the balance of payments accounts can be split into?

Answer 6

1-the current account, where payments for the purchase and sale of goods and services are recorded
2-the capital and financial accounts, where flows of money associated with saving, investment, speculation and currency stabilisation are recorded

Question 7

what sign (in the accounts) are flows of money into the country given?

Answer 7

they are given a positive sign

Question 8

what sign (into the accounts) are flows of money out of the country given?

Answer 8

they are given a negative sign

Question 9

what sign (into the accounts) are flows of money out of the country given?

Answer 9

they are given a negative sign

Question 10

what are the 3 different parts in which the current account is itself split into?

Answer 10

-trade in goods
-trade in services
-primary and secondary income

Question 11

what is meant by trade in goods?

Answer 11

-this is often called trade in visibles. This is trade in raw materials such as copper and oil, semi-manufactured goods such as car components and finished manufactured goods such as cars, tablets or mobile phones.
-visible exports are goods which are sold to foreigners. Goods leave the country, whilst payment for these goods goes in the opposite direction. Hence visible exports or, say, cars result in an inward flow of money and are recorded with a positive sign on the balance of payments account.
-visible imports are goods which are bought by domestic residents from foreigners. Goods come into the country whilst money flows out. Hence visible imports of, say, wheat are given a minus sign on the balance of payments.

Question 12

what is meant by balance of trade?

Answer 12

it is the difference between the value of visible exports and visible imports

Question 13

what is meant by trade in services?

Answer 13

-trade in services is an example of trade in invisibles. These are intangible services.
-exports of invisibles are bought by foreigners.
-with invisibles, money flows into the UK. Hence, on the official UK balance of payments accounts, invisible service exports are called export credits in services.
-import services for the UK are services which are bought from other countries. A holiday taken by a UK national in Spain would be an invisible import for the UK. With invisible imports, money flows abroad. Hence they are called debits on the official UK balance of payments accounts.

Question 14

what is meant by primary and secondary income?

Answer 14

-not all flows of money result from trade in goods and services.
-primary income results from the loan of factors of production abroad. For the UK most of this income is generated from interest, profits and dividends on assets owned abroad.
-secondary income is a range of mainly government transfers to and from overseas organisations such as the European Union
-primary and secondary income are examples of invisible along with trade in services

Question 15

what is meant by the current balance?

Answer 15

it is the difference between the value of exports and total imports.
-it can also be calculated by adding the balance of trade in goods with that of services, income and current transfers.

Question 16

the current account balance can be in what?

Answer 16

it can be in surplus or deficit

Question 17

when does a current account surplus occur?

Answer 17

it occurs when exports are greater than imports. The money flowing into the country from trade in goods and services, as well as primary and secondary income, are greater than the money flowing out of the country from these transactions.

Question 18

when does a current account deficit occur?

Answer 18

when imports are greater than exports. The money flowing out of the country from trade in goods and services, as well as primary and secondary income, is greater than the money flowing into the country from these transactions

Question 19

what are governments 4 economic objectives?

Answer 19

-economic growth
-low unemployment
-balance of payments equilibrium
-low and stable inflation

Question 20

for the UK why are there potential conflicts with achieving the economic objectives?

Answer 20

-high economic growth tends to be associated with low unemployment but increased inflationary pressures. Unlike other economies, high economic growth in the UK in recent decades has never been caused by a boom in exports. Instead, it tends to arise from increases in consumption spending or government spending, leading to a rise in AD.
-The rise in consumption and gov spending leads to an increased demand for imports. Hence, high economic growth is linked, for the UK, with a deterioration in the current account on the balance of payments.
-when the economy has gone into recession, with AD falling, the demand for imports has tended to fall. Inflation tends to fall and unemployment rises. The current account, however, on the balance of payments tends to improve.

Question 21

what type of growth do govs like to see?

Answer 21

they like to see export-led growth.
-this is a rise in economic growth due to a rise in exports. This would reduce unemployment and improve the current account balance on the balance of payments.
-the economic cost might be higher inflation. However, despite frequent export initiatives, successive UK govs have never achieved this.

Question 22

what are 2 common mistake regarding current account deficits?

Answer 22

-a common mistake is to assume that any current account deficit is paid for by the government.
-another common mistake is to assume that gov borrowing is the same as the current account deficit.
-the current account is made up of billions of individual transactions. Each one is financed in a different way. So a UK firm importing machinery will use different finance from a family taking a holiday in France.

Question 23

if a current account deficit has been caused mainly by excessive gov spending, then what has the gov most likey done? However, what else may a current account deficit be caused by?

Answer 23

then it is likely the gov has borrowed at least some of the money from abroad.
-however, a current account deficit may be caused mainly by private consumers and firms buying too many imports and borrowing money from abroad to pay for them.