Global Context

Question 1

Components of current account

Answer 1

Balance of trade in goods
Balance of trade in services - uk has trade surplus in services
Primary income (net investment income) - interest, dividends, remittances
Secondary income (current transfers) - transfer of money where no goods/services switch hands e.g. foreign aid

Question 2

Components of financial account

Answer 2

Direct investment - net investment from abroad e.g. UK firm building factory in Japan

Portfolio investment - purchase of stocks, shares and bonds - this may worsen primary income form CA long term as UK firms have to pay people more dividends

Reserve assets - official reserves of foreign currencies and gold held by central bank

Question 3

Causes of CA deficit

Answer 3

Loss of advantage in many industries - deindustrialisation

Growth in real incomes - more spending on high Q imports

Strong ER

Low levels of investment - less output so more imports, less exports

Weak innovation - not as high quality

Relative inflation - if UK inflation higher than China, chinese goods still cheaper

Demographics - retirees holiday more so more imports, ageing population need drugs imported from US