Disequilibrium in the Balance of Payments Flashcards

1
Q

What reasons can a surplus be bad?

A

Inflationary Pressures
Exchange Rate Distortions
Global Imbalances
Resource Misallocation

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2
Q

How does a surplus cause inflationary pressures?

A

A sustained surplus means an excess inflow of foreign currency, which can increase domestic money supply leading to inflation

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3
Q

How does a surplus cause exchange rate distortions?

A

A large surplus leads to currency appreciation. Overvalued currencies harm export competitively causing more imports leading to trade imbalance

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4
Q

How does a surplus cause global imbalances?

A

Surpluses in a country may mirror deficits in others. This destabilises the global economy and causes tensions

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5
Q

How does a surplus cause resource misallocation?

A

Surpluses used by excessive saving or under-consumption indicates misallocation of resources and low domestic welfare

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6
Q

What is a disequilibrium in the balance of payments?

A

Where credit exceed debit or debit exceeds credit

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7
Q

What are the causes of a surplus in the balance of payment?

A

High Export Levels
Low Import Levels
Strong Remittance Inflows
High Income from Investments
Large Capital Inflows
Exchange Rate Policies
Strong Economic Fundamentals
Favourable External Conditions

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8
Q

How do high export levels cause a surplus in the balance of payments?

A

Competitive Exports
Strong Global Demand

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9
Q

How do low import levels cause a surplus in the balance of payments?

A

Protectionist Policies and trade restrictions limit imports
Domestic Substitution means countries produce enough so rely less on imports
Weak Domestic Demand require fewer imports

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10
Q

How do strong remittance inflows cause a surplus in the balance of payments?

A

Worker remittances from working citizens increase inflows leading to a surplus

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11
Q

How do high income form investments cause a surplus in the balance of payments?

A

Foreign Investment Returns from interest, dividends, or profits, increase income flows

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12
Q

How do large capital inflows cause a surplus in the balance of payments?

A

Foreign Direct Investment create surplus in the capital/financial account
Portfolio Investments from foreigners in financial assets boost the capital account
Loans or Aid from foreign lenders or international aid add to capital inflows

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13
Q

How do exchange rate policies cause a surplus in the balance of payments?

A

Undervalued currency makes exports cheaper
Currency Pegging with fixed regimes that undervalue lead to surpluses

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14
Q

How do strong economic fundamentals cause a surplus in the balance of payments?

A

High Savings Rate run surpluses
Competitive Industries lead to consistent trade and income surpluses

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15
Q

How do favourable external conditions cause a surplus in the balance of payments?

A

Global Commodity Prices may run surpluses due to high global prices
Trade Agreements boost export access to foreign markets

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16
Q

What are causes of deficit in balance of payments?

A

Population Growth
Development Programmes
Demonstration Effect
Natural Factors
Inflation
Globalisation
Economic Growth
Recession in Trading Partners
Overvalued Exchange Rate

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17
Q

How does population growth cause a deficit?

A

To meet the needs of a growing population, it may require imports causing a deficit

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18
Q

How does economic growth cause a deficit?

A

Economic growth causes a rise in incomes, of which a proportion will be spent on imports

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19
Q

How do development programmes cause a deficit?

A

Developing countries need to import capital, raw materials. The development programmes behind this require imports

20
Q

How does the demonstration effect cause a deficit?

A

People in less developed countries imitate consumption patterns of the people in developed countries, so their imports increase

21
Q

How do natural factors cause a deficit?

A

Natural calamities affect agriculture and industrial production so exports may decline and imports increase

22
Q

How does inflation cause a deficit?

A

If UK inflation rises faster than competitors, UK exports become less attractive causing a deficit

23
Q

How does globalisation cause a deficit?

A

The new economic order changed by globalisation has caused problems to some countries such as a deficit

24
Q

How does a recession in trading partners cause a deficit?

A

Economic downturns in key trading partners reduce demand for UK exports

25
Q

How does an overvalued exchange rate cause a deficit?

A

An overvalued currency makes a country’s exports more expensive and negatively impacts the trade balance

26
Q

What are the 3 exchange rates?

A

Floating
Fixed
Managed/Dirty Floating

27
Q

What are the floating exchange rates?

A

Floating exchange rates are flexible and those that are affected by demand and supply

28
Q

What are fixed exchange rates?

A

Fixed exchange rates remain constant

29
Q

What are managed/dirty floating exchange rates?

A

Managed/Dirty Floating exchange rates is were the central bank intervenes when necessary

30
Q

What are the measures used to correct a deficit in the balance of payments?

A

Deflation
Exchange Depreciation
Devaluation
Exchange Controls
Tariffs
Quotas
Export Promotion
Import Substitution

31
Q

How does deflation correct a deficit?

A

Deflation makes UK exports cheaper in foreign markets resulting in a rise in UK exports
Moreover, the demand for imports fall due to higher taxation and reduced income

32
Q

How does exchange depreciation correct a deficit?

A

Exchange depreciation means decline in the rate of exchange. This stimulates exports and reduces imports as exports become cheaper and imports are more costly

33
Q

How does devaluation correct a deficit?

A

Devaluation is the deliberate attempt made by monetary authorities
It has the same affect as exchange depreciation

34
Q

How does exchange control correct a deficit?

A

Governments implement controls to restrict foreign exchange outflows. Policies can limit the amount of foreign currency people can access, reducing imports and encouraging domestic production

35
Q

How do tariffs correct a deficit?

A

Tariffs are imposed on imports increasing their price and reducing their demand

36
Q

How do quotas correct a deficit?

A

The government may fix and permit the maximum quantity and value of a commodity to be imported during a given period

37
Q

How does export promotion correct a deficit?

A

The government promote export by providing required administrative and diplomatic help to tap potential markets

38
Q

How does import substitution correct a deficit?

A

Import substitution reduces the volume of imports and make it self-reliant using fiscal and monetary measures to encourage industries

39
Q

How do interest rates correct a deficit?

A

Raising interest rates means that borrowing becomes expensive, reducing demand and consequentially the demand for imports

40
Q

What are the measures for correcting a surplus in the balance of payments?

A

Currency Appreciation
Boosting Domestic Consumption and Investment
Liberalising Imports
Reducing Capital Inflows
Open Market Operations
Structural Reforms

41
Q

How does currency appreciation correct surplus?

A

Currency appreciation reduces export competitiveness and makes import cheaper

42
Q

How does boosting domestic consumption and investment correct surplus?

A

Governments stimulate domestic demand through fiscal policies, increased public spending, tax cuts and encouraging consumers

43
Q

How does liberalising imports correct a surplus?

A

Reducing barriers to import can increase inflow of goods and services, offsetting export surpluses

44
Q

How does reducing capital inflows correct a surplus?

A

Governments can implement policies to limit capital inflows that add to financial account surpluses

45
Q

How do open market operations correct a surplus?

A

Central banks can donut open market operations to absorb excess foreign currency inflows, preventing inflation and excessive currency appreciation

46
Q

How do structural reforms correct a surplus?

A

Encouraging long-term reforms like infrastructure or diversifying the economy can balance trade and capital flows over time