Macro 19 - balance of payments

Question 1

define balance of payments?

Answer 1

Financial records of a country’s transactions with the rest of the world.

Question 2

what are the 2 functions of balance of payments?

Answer 2

1. records the money coming in and going out of a country.
2. Supply and demand of a currency.

Question 3

what 3 components are balance of payments are made up of?

Answer 3

1. current account.
2. capital account.
3. financial account.

Question 4

define current account?

Answer 4

Is a measure of the flow of funds from trade in goods and services.

Question 5

what are the 4 components of the current account?

Answer 5

1. trade in goods.
   2 . trade in services.
2. primary income.
3. secondary income.

Question 6

what is trade in goods?
(visible)

Answer 6

Any trade that is tangible.
Eg: All manufactured goods.

Question 7

what is trade in services?

Answer 7

Any trade that is intangible.
Eg: financial services

Question 8

what is primary income?
(net investment income)

Answer 8

Income from investment.
Eg: profits, interest, dividends

Question 9

what is secondary income?
(current treansfers)

Answer 9

Records the exchange of money for which no goods or services have been transferred.
Eg: NGO’s , foreign aid, remittances.

Question 10

What is it called if more money is flowing into the country than flowing out?

Answer 10

Current account surplus.
X>M

Question 11

What is it called if more money is flowing out of the country than flowing in?

Answer 11

Current account deficit.
M>X

Question 12

Is trade of goods in a surplus or deficit in the UK?

Answer 12

Deficit.
Since 1997.
Increases every year.

Question 13

Is trade of services in a surplus or deficit in the UK?

Answer 13

surplus.
UK has a big financial sector.

Question 14

Is primary income in a surplus or deficit in the UK?

Answer 14

Deficit.
It was a surplus until 2012.

Question 15

Is secondary income in a surplus or deficit in the UK?

Answer 15

Deficit.
Migrant workers are sending money back home.

Question 16

why is the UK in a current account deficit even if they have a trade in service surplus?

Answer 16

Because deficits are big in the other 3 components.

Question 17

what is the financial account?

Answer 17

Measures the foreign ownership of domestic financial assets.

Question 18

what is a financial account surplus?
(CA deficit)

Answer 18

If there is more foreign investment in your country than what you have invested in a foreign country.

Question 19

what is a financial account deficit?
(CA surplus)

Answer 19

If your country has invested more in a foreign country than what the foreign country has invested in your country.

Question 20

what are the 3 components of the financial account?

Answer 20

1. Direct investment (FDI).
2. Portfolio investment (a purchase of a countries securities such as bonds and shares.
3. Reserve assets (reserves of foreign currency or gold)

Question 21

What is debit?

Answer 21

Any money going out of the financial account.

Question 22

What is credit?

Answer 22

Any money coming into the financial account

Question 23

what transactions are recorded on the capital account?

Answer 23

• Investments.
• Debt forgiveness.
• Inheritance taxes.
• Any transfer of assets.

Question 24

what is the reason of the for the balance of the balance of payments - why a surplus in one component leads a deficit in another.

Answer 24

We buy imports, we supply pounds to our trading partners. Someone on the other side receives our pounds. This money is reinvested back into the UK as a form of FDI or loan to our government.