Essay Flashcards
What is the balance of payments?
A record of a country’s trade and investment with other countries
When does a current account deficit occur?
When the country’s expenditure abroad exceeds its revenue from abroad
When does a current account surplus occur?
When the country’s revenue from abroad is greater than its expenditure abroad
What is current account balance?
A record of a country’s trade in goods, trade in services, income and current transfers
Why does a current account deficit occur?
- Because a country’s inhabitants have spent more on goods and services from abroad than overseas residents have spent on the country’s products
AND/OR - because there has been a net outflow of investment income
What are the causes of a current account deficit?
- Changes in income at home and abroad
- Changes in the exchange rate
What might cause a current account surplus?
- If products are at a high quality, are produced at a low cost and reflect what households and firms at home and abroad want to buy
What are the consequences of a current account deficit?
If a deficit increases, it will reduce AD in the economy. This will lower the economy’s output, be likely to raise unemployment and may put downwards pressure on the price level
What are the consequences of a current account surplus?
The increase in money supply means banks have more money, which can increase bank lending. A rise in the surplus will mean that net exports are increasing. This will raise AD and be likely to push up the exchange rate.
