Chapter 26

Question 1

What is a part of the current account

Answer 1

Trade in goods
Current transfers (primary income)
Trade in services
Investment Income (secondary income)

Question 2

What is a part of the financial account

Answer 2

Net direct investment
Transaction In reserve assets
Total net portfolio investment
Other transactions of financial assets

Question 3

What is part of the capital account

Answer 3

transferring ownership of fixed assests

Question 4

What is a trade surplus

Answer 4

When the value of exported goods and services is higher than the countries imports. The country exports more than it imports

Question 5

What is a trade deficit

Answer 5

When the value of the imported goods and services is higher than the value of a country’s exports. The country imports more than it exports

Question 6

Causes of current account deficit

Answer 6

Import exceed export
trading partners are experiencing economic difficulties
Booming domestic economy is importing more luxury goods
exports suffer in terms of competitiveness, price and quality
Importin raw materials

Question 7

Causes of current account surplus

Answer 7

Exports exceed imports
Internationally competitive goods and services
A weak currency makes goods and service prices competitive
Recessions mean less imported goods such as luxury goods

Question 8

What effects the size of the deficit/surplus in the current account

Answer 8

Exchange rates (overvalued exchange rate would cause deficit)
Level of consumer spending on imports
capital flows to fiance the deficit
Saving rates
Relative inflation/competitiveness

Question 9

Floating exchange rate can…. (free market approach)

Answer 9

it can appreciate (up in value), depreciate (down in value)

Question 10

Fixed exchange rate can…. (government approach) “pegged”

Answer 10

it can be revalued (up in value) or devalued (down in value)

Question 11

How can the depreciation of an exchange rate cause inflation

Answer 11

1) rises the price of imports
2) increase domestic demand
3) reduce incentives for firms to reduce costs
These reduce the competitiveness of the UK

Question 12

Factors that affect competitiveness

Answer 12

relative wages
Labour productivity
Standard of infrustructure
Investment in technology

Question 13

What is the j-curve

Answer 13

The reason for devalued of exchange rates. Long-term hope of improving exports but causes short term. and in the short term discouraging imports. It has the aim because exports are now much cheaper demand for these goods and services will increase.and in the long term lead to a current account surplus. But in the short term the current account will worsen

Question 14

If a country has a financial account surplus…

Answer 14

It must have a current account deficit

Question 15

if a country has a current account surplus….

Answer 15

It must have a financial account deficit

Question 16

What are long term factors with a current account surplus

Answer 16

rising national reserves
Increased protectionism of UK industries

Question 17

Factors causing a current account deficit

Answer 17

The rate of consumer spending on imports. For example, during an economic boom, there will be increased spending and this will cause a deficit on the current account.

International competitiveness. If a country experiences higher inflation than its competitors, exports will be less competitive leading to lower demand.

Exchange rate. If the exchange rate is overvalued, it makes exports relatively more expensive leading to a deterioration in the current account.

Structure of economy – deindustrialisation can harm the export sector.