Chapter 39: Current account of balance of payments

Question 1

Balance of payments

Answer 1

record of all economic transactions between the redsidents of a country and the rest of the world in a particular period

Question 1

Components of the current account

Answer 1

• Trade in goods
• Trade in services
• Primary income
• Secondary income

Question 2

Changes in exports and imports

Answer 2

• Country’s inflation rate
• Exchange rate
• PRoductivity
• Quality
• Marketing
• Domestic GDP
• Foreign GDP
• Trade restrictions

Question 3

Causes of a current account deficit

Answer 3

• Incomes home and abroad - low incomes abroad and/or high incomes abroad referred to as cyclical deficit
• High exchange rate
• Structural problems - problem with the products manufactured by frms in the country, costs incurred to produce them, prices at which they are sold, and strategies adopted for marketing them
• Deficiet on primary income and/or secondary income

Question 4

Consequences of a current account deficit

Answer 4

• Country is consunign more goods and services than what it is producing
• Reduction in inflationary pressure - fall in demand
• Output and employment lower than possible
• Recessions abroad will not last
• Downward pressure on exchange rate - exports will bcome cheaper and improts will become more expensive - deficit may be eliminated
• Deficit may produce if its from a lack of international competitiveness

Question 5

Causes of current account surplus

Answer 5

• Low exchange rate
• High quality of domestically produced products
• HIgh incomes abroad
• Low costs of production
• High investment income earned abroad
• Recipt of high workers’ remittances

Question 6

Consequences of current account surplus

Answer 6

• Increase aggregate demand and lead to a rise in gdp and employment
• Demand pull inflation if the economy is operating close to full capacity
• Country is consuming fewer products than it is producing
• May result in appreciationg - demand for the currency will exceed its supply

Question 7

Measures to correct a current accoutn deficit

Answer 7

• Imposing import restrictions
• Subsidising exports
• REducing foreign echange rate
• Lower spending - income tax, raise interest, indirect taxes
• Supply side policy measures ( avoid retaliation, inflation, and a higher unemployment)

Question 8

Measures to correct a current account surplus

Answer 8

• Revalue a fixed exchange rate or encourage an appreciation of a floating exchange rate
• Enable households and firms to purchase more imports by making use of expansionary policies