Lesson 12 - Balance of Payments

Question 1

What are the 2 aspects of the balance of payments?

Answer 1

Current account
Capital account

Question 2

What is the Balance of Payments?

Answer 2

Record of transactions made between consumers, businesses + government in one nation or between nations

Question 3

What are the 2 types of flows into the Balance of Payments?

Answer 3

Inflows/Positive entry
Outflow/Negative entry

Question 4

What is each respective flow also known as?

Answer 4

Inflow - Credit
Outflow - Debit

Question 5

What are the 4 main components of the current account?

Answer 5

Trade balance in goods
Trade balance in services
Net money transfers
Net investment income from abroad

Question 6

What does trade balance in goods consist of?

Answer 6

Final manufactured goods, components, raw materials
Energy products, technology + machinery

Question 7

What does trade balance in services consist of?

Answer 7

Banking, insurance, consultancy
Tourism, transport, logistics
Shipping, education, health
Reasearch, cultural acts

Question 8

What does net money transfers consist of?

Answer 8

Overseas aid + debt relief
Private money transfers (E.g., remittances)

Question 9

What does net investment income from abroad consist of?

Answer 9

Profits, interest + dividends from investments in other countries

Question 10

What does the capital account include?

Answer 10

Flows of money for investment purposes
FDI, banking flows, government debt sold abroad

Question 11

Does the UK have a current account surplus or deficit +explain?

Answer 11

Deficit (Consistently since 80s)
Importing more goods + services than it is exporting

Question 12

What are the reasons for a current account deficit?

Answer 12

Overvalued exchange rates
High consumer spending
Unbalanced economy
Competitiveness

Question 13

How does an overvalued exchange rate result in a current account deficit?

Answer 13

Expensive exports
Cheap imports

Question 14

How does high consumer spending result in a current account deficit?

Answer 14

Increase in imports, causes current account deterioration

Question 15

How does an unbalanced economy result in a current account deficit?

Answer 15

Focus on consumer spending rather than investments + exports

Question 16

How does competitiveness result in a current account deficit?

Answer 16

Firm competitiveness relates to exchange rates
Competitiveness declines, exports made more difficult

Question 17

What are the main explanations for the UK’s current account deficit?

Answer 17

Deficit in goods/Net importer
Financial flows - Investment from abroad
Economic cycle - Boom, demand for imports > exports
Low saving rate - Spending encouraged

Question 18

Why should we be concerned about the current account deficit?

Answer 18

Sign of uncompetitiveness (Lower economic growth)
If capital dries up, exchange rate + living standards may depreciate
Sign of unbalanced economy

Question 19

Why should we not be concerned about the current account deficit?

Answer 19

Been persistent since 80s
Globalisation makes flows easier to attract, flows can finance the deficit

Question 20

Which policies can be implemented in order to reduce the deficit?

Answer 20

Reduced consumer spending
Side policies to improve competitiveness
Devaluation of the exchange rate (Cheap exports, costly imports)