chapter 39 -current accounts

Question 1

Define Balance of Payments

Answer 1

The balance of payments is a financial record of a country’s transactions with the rest of the world for a given time period, usually a year

Question 2

What are visible exports

Answer 2

Visible exports are goods which as sold to foreign customers, with money flowing into the domestic economy

Question 3

What are visible imports

Answer 3

Visible imports are goods bought by domestic customers from foreign sellers, resulting in money outflow from the domestic economy.

Question 4

How does CA deficit lead to increased borrowing

Answer 4

since a country cannot spend more than it earns in the long run, they need to borrow money or attract FDI to rectify its CA deficits. in addition, there is an opportunity cost of debt repayments as the government cannot use this money to stimulate economic growth

Question 5

How does CA deficit lead to lower standards of living

Answer 5

if the current account deficit is caused by a negative balance on net incomes, this means capital outflows exceed capital inflows for the country. an economy with less income is likely to suffer from lower sol. to cut the CA deficit, households and firms may need to reduce their spending

Question 6

How does CA deficit lead to lower exchange rate

Answer 6

a fall in demand for exports and/or a rise in the demand for imports reduces the exchange rate. while this means that exports become more price competitive, it also means that essential imports will become more expensive. this may lead to imported inflation

Question 7

How does CA surplus lead to inflationary pressures

Answer 7

higher demand for exports can lead to demand-pull inflation. therefore, the CA surplus can diminish the international competitiveness of the country in the long run as the price of exports rises due to inflation