Chapter 28/29

Question 1

What is the balance of payments?

Answer 1

A record of all the transactions in international trade, split into two parts: current account and capital and financial records.

Question 2

What is the name of the part of the balance of payments that shows money flow of savings, investments, and currencies?

Answer 2

Capital and financial account

Question 3

What does the capital and financial account show?

Answer 3

The money flow of savings, investment and currencies.

Question 4

What is the difference between capital and financial accounts?

Answer 4

Capital: shows the movement of non-financial assets e.g. death tax, sale of land
Financial: shows the transfer of financial assets e.g. FDI, loans

Question 5

What is shown in the current account?

Answer 5

Exports, imports (visible/invisible), primary and secondary income

Question 6

What is primary income?

Answer 6

Shown in the current account, its the money earned from working/investing in other countries e.g. workers wages, business receiving interest from giving loans abroad.

Question 7

What is secondary income?

Answer 7

This is money that comes into or leaves the country as a gift or help from others, without getting anything in return. e.g. remittances, foreign aid

Question 8

What is meant by exports and imports?

Answer 8

Exports- Goods/services sold overseas by a nation
Imports- Goods/services bought from overseas by a nation.

Question 9

What is the current BALANCE?

Answer 9

Difference between total imports and total exports of a nation. Can be deficit or surplus.

Question 10

What is meant by current deficit and surplus?

Answer 10

Surplus- Exports>imports(+)
Deficit- Imports>Exports (-)

Question 11

What is visible/invisible trade?

Answer 11

Visible- Trade in goods
Invisible- Trade in services

Question 12

What is visible balance?

Answer 12

Difference between visible exports and visible imports

Question 13

What is meant by an exchange rate?

Answer 13

Price of one currency in terms of another.

Question 14

What affect does the exchange rate have on the current balance?

Answer 14

If the value of your currency rises, exports become expensive and imports become cheaper. (Negative impact on current account)

Question 15

What affect does the current balance have on exchange rates?

Answer 15

If a country is in surplus, so demand for exports is high, the value of the currency will rise because of the increased demand. So the exchange rate gets stronger.

Question 16

State the reasons for current account surpluses and deficits.

Answer 16

Quality of domestic goods.
Quality of foreign goods.
Price of domestic goods.
Price of foreign goods.

Question 17

How does the quality of domestic and foreign goods affect the current balance?

Answer 17

-If the quality of domestic goods is good, demand will rise, causing a surplus.
-If the quality of foreign goods is good, demand for imports will rise, causing a deficit.

Question 18

How does the price of domestic and foreign goods affect the current balance?

Answer 18

If domestic goods are cheaper, the demand for them rises, causing exports to rise (surplus).
If foreign goods are cheaper, the demand for imports by the nation will rise, causing a deficit.

Question 19

What happens when exchange rate falls?

Answer 19

The value of the currency falls, meaning that its cheaper for overseas buyer to buy (bc they need less of their currency). This causes demand for exports to rise, which has a positive impact on the current account.

Question 20

What impacts does a current account deficit have?

Answer 20

Leakages from the economy, Inflation, Low demand for exports, funding the deficit

Question 21

Why is a leakage from the economy bad?

Answer 21

It means an overreliance on imports, this means money is flowing out of the economy into another. Output and employment are under threat.

Question 22

How is inflation caused by a current account deficit?

Answer 22

If imports greater than exports, it means demand for foreign currency is rising and domestic currency weakens. This makes imports more expensive, so overall prices rise= inflation.

Question 23

How is low demand for exports bad for the current account?

Answer 23

It means imports>exports and so there is a deficit. The country may face unemployment and reduced economic growth.

Question 24

Why does the deficit have to be funded?

Answer 24

Foreign currency is needed to pay for imports, eventually foreign currency reserves will end. The nation then has to borrow with high interest rates.

Question 25

Which business activities damage the environment?

Answer 25

Mining, power generation, chemical processing, agriculture, construction.

Question 26

Describe how mining destroys the environment.

Answer 26

Materials are extracted from underground, rocks may be crushed, releasing harmful chemicals (tailings), destroying wildlife and contaminate water.

Question 27

How does power generation destroy the environment?

Answer 27

Generating electricity may need burning fossil fuels, causing CO2 emissions, contributing to global warming+ acid rain.