ECONOMICS-BOP

Question 1

Balance of payments is

Answer 1

A record of a country’s economic transactions with the rest of the world over a year.

Question 2

Current account includes

Answer 2

1. Trade in goods
2. Trade in service
3. Investment income
4. Current transfers

Question 3

Trade in goods balance is AKA

Answer 3

visible balance/ merchandise balance or balance of trade

Question 4

Current account balance is

Answer 4

The sum of total credits and debits in current account.

Question 5

The current account balance shows

Answer 5

How much a nation has spent on foreign goods, services, investment income payments, and transfers relative tho how much it has earned from other countries.

Question 6

Balance of trade is

Answer 6

The difference between the export revenue of goods and services and import expenditure of goods and services.

Question 7

Capital account is a record of

Answer 7

capital transfers and the acquisition and disposal of non-produced, non-financial assets. It is a relatively small part of the balance of payments

Question 8

Capital account covers

Answer 8

1. government debt forgiveness 债务减免
2. !!!money brought into and taken out of the country by migrants
3. the sales and purchases of copyrights, patents and trademarks

Question 9

Financial account is a record of

Answer 9

The transfer of financial assets between the country and the rest of the world

Question 10

Financial account includes

Answer 10

1. Direct investment
2. Portfolio investment
3. Other investment
4. Reserve assets

Question 11

Direct investment covers

Answer 11

1. The building of a factory and takeover of an existing firms in foreign country. (debit item)
2. The setting up of a new plant and takeover of a firm in the country by a foreign firm. (credit item)

Question 12

Portfolio investment covers

Answer 12

1. The purchase of (foreign) bonds and shares that do not involve legal control of a firm. (debit items)
2. The sale of (foreign) bonds and shares that do not involve legal control of a firm. (credit items)

Question 13

Other investment covers

Answer 13

Shorter-term movements of financial investment including bank loans and inter-government loans, etc.

Question 14

Reserve assets are

Answer 14

Mainly made up of the government’s holdings of foreign exchange reserves, gold, special drawing rights(特别提款权) and changes in country’s reserve position in the IMF

Question 15

A current account deficit must be offset by

Answer 15

A capital and financial account surplus

Question 16

If expenditure exceeds revenues, then the country needs to finance the additional expenditure:

Answer 16

1. by borrowing from abroad/ selling assets to foreigners

2. by reducing official reserve assets

Question 17

Causes of current account deficit

Answer 17

1. trade deficit
2. deficit on income and current transfer
3. 1&2

Question 18

Causes of trade deficit

Answer 18

1. reduction in exports

2. increase in imports

Question 19

Why exports fall and imports rise?

Answer 19

1. Uncompetitive price
2. Uncompetitive quality
3. Temporary reduction in domestic supply (export fall)
4. Cyclical falls in foreign income (export fall)
5. Cyclical rises in domestic income (import rise)(growing economy)

Question 20

Structural deficit of current account

Answer 20

Uncompetitiveness of goods and services

Question 21

Cyclical deficit of current account

Answer 21

1. Cyclical falls in foreign income

2. Cyclical rises in domestic income

Question 22

Might current account deficit be a problem?

Answer 22

1. Structural deficit is a problem: not self-correcting.
2. Cyclical deficit, growing domestic economy and temporary reduction of domestic supply are not problems: short-term and self-correcting.

Question 23

Why is current deficit caused by a growing economy not a problem?

Answer 23

1. Attracts foreign investment - capital inflows offset capital outflows in current account.
2. Self-correcting: more raw material more products sold.

Question 24

Capital & financial account deficit consists of

Answer 24

1. Large capital outflow

2. Small capital inflow

Question 25

Might capital and financial account deficit be a problem?

Answer 25

No. Generating future inflow of profits, interest and dividends. BUT it is a concern if it results from a long-term lack of confidence.

Question 26

Consequences of current account deficit

Answer 26

1. Money supply (quantity of money) decreases 2. Downward pressure (贬值压力) on the exchange rate - Fixed exchange rate: run out of foreign currency reserves 3. Short run living standard improved 4. Aggregate demand reduced 5. Net holding of foreign assets falls (borrow from abroad)(rise in external debt)

Question 27

Should current account deficit be a concern? | Essay structure

Answer 27

Causes - affordability - size - continuity - effect on the economy

Question 28

Expenditure switching policy is

Answer 28

All consumers buy more domestic and less foreign

Question 29

Expenditure dampening policy is

Answer 29

Reduce the total level of spending (reduce AD)

Question 30

Fiscal policy

Answer 30

1. Taxation | 2. Government spending

Question 31

Monetary policy

Answer 31

1. Exchange rate 2. Interest rate 3. Money supply

Question 32

Supply side policy

Answer 32

1. Income tax reduction 2. Education and training 3. Restrict trade union power 4. Privatization 5. Deregulation 6. Subsidies 7. Remove trade barriers 8. Increase competition

Question 33

Expenditure dampening policy & fiscal policy

Answer 33

1. Raise income tax | 2. Lower government spending

Question 34

Expenditure switching policy & fiscal policy

Answer 34

Imposition of tariffs and other trade barriers

Question 35

Drawbacks of raising income tax

Answer 35

1. reduce incentives | 2. contractionary/ deflationary fiscal policy: decrease AD, increase unemployment, slow down economic growth.

Question 36

How raising income tax works for dampening

Answer 36

consumers are left with lower disposable income

Question 37

How imposing tariffs works for expenditure switching

Answer 37

imported goods become more expensive

Question 38

Imposition of tariff works well when

Answer 38

High quality, domestically produced substitutes are available Domestic consumers have elastic demand for imported goods The country is not imposing tariffs against fellow members of a trade bloc, in which tariff is not an option.

Question 39

Any drawbacks of imposition of tariff?

Answer 39

1. Impedes specialization and benefits of free trade 2. Reduces pressure on domestic firms to compete 3. Provokes retaliation

Question 40

Are non-tariff barriers expenditure switching policies?

Answer 40

YES. | e.g. quotas, exchange control, export subsidies......

Question 41

Factors determining whether a quota is an effective measure to reduce import expenditure:

Answer 41

1. the level at which the quota is set 2. the elasticity of domestic demand for foreign products 3. may provoke retaliation

Question 42

How lower government spending works for dampening

Answer 42

directly reduce aggregate demand for goods & services 👉lower expenditure on imports and domestic goods (contractionary/ deflationary fiscal policy) 🔥multiplier effect makes the reduction of AD bigger

Question 43

If fiscal policies (switching and dampening) are stopped, will consumers increase spending on imported goods again?

Answer 43

Yes. 1. Short-term, not long term. 2. Contractionary slows down economic growth and increases unemployment. 3. Time lags: takes time to work. 4. Ineffective to reduce income and current transfer deficit.

Question 44

Expenditure switching policy

Answer 44

1. imposition of tariffs 2. imposition of other trade barriers 3. devalue exchange rate 4. lower interest rate 5. increase growth of money supply

Question 45

Expenditure dampening policy

Answer 45

1. raise income tax (con fis) 2. lower government spending (con fis) 3. raise interest rate (de mon) 4. reduce growth of money supply (de mon)

Question 46

Supply side policy is

Answer 46

a general term to refer to a number of different actions that a government could take which enable markets to work efficiently and to boost the productive potential of an economy

Question 47

How does supply side policy correct BOP disequilibrium

Answer 47

Supply side policy may reduce a current account deficit and a financial account deficit.

Question 48

How does supply side policy MAKE DOMESTIC PRODUCTS MORE COMPETITIVE

Answer 48

1. more skilled labor force and better equipment 2. more competitive pressure on domestic firms 3. more responsive of firms to changes in consumer demand 👉low price and high quality domestic products

Question 49

How does supply side policy MAKE DOMESTIC MARKET MORE ATTRACTIVE TO INVEST IN

Answer 49

1. better worker and equipment 2. less action of trade union 3. economic prospects brings more portfolio

Question 50

Drawbacks of supply side policy

Answer 50

1. reduction in income tax: work fewer hours 2. improved education: long time 3. privatization: inefficiency if monopoly 4. government subsidies: domestic complacent and foreign retaliation