Macro 3 - BoP and trade

Question 1

What is the balance of payments?

Answer 1

It is where all the flows of money going in and out of a country is recorded

Question 2

What are the four sections of the current account?

Answer 2

Trade in goods
Trade in services
Primary income
Secondary income

Question 3

What are trade in goods? Any examples?

Answer 3

Trade in goods measures imports and exports of visible (tangible) goods. This includes coal, machinery, oil etc

Question 4

What are trade in services? Any examples

Answer 4

Trade in services measures imports and exports of services. These include insurance, tourism and banking

Question 5

What is primary income? Any examples?

Answer 5

Flows of money in and out of a country specifically from employer and earlier investment. This includes dividends from foreign firms and deposits in foreign banks which you receive interest from

Question 6

What is secondary income? Any examples?

Answer 6

Transfers of money that aren’t paying for goods or that aren’t investments. These include payments made to family members living abroad and aid paid to foreign countries

Question 7

What is recorded on the capital account?

Answer 7

It is used to record the flow of miscellaneous goods coming in and out of a country. This includes inheritance tax, immigration etc

Question 8

What is recorded on the financial account?

Answer 8

Foreign direct investment (FDI)
Portfolio investment - investment in financial assets like shares in overseas companies
Financial derivatives - foreign currencies
Reserve assists - assets held by the Bank of England for use when they are needed

Question 9

Why might there be a current account deficit?

Answer 9

• When there is high levels of consumer spending (low savings rate) so firms end up buying more imports
• it is struggling to compete internationally so a reduction of exports, could also be due to a rise in the value of a currency
• It has to deal with external shocks such as a rise in imported raw materials and the implosion of trade barriers

Question 10

Why might there be a current account surplus?

Answer 10

• it has been experiencing a recession so they try to be more competitive with their exports
• domestic currency has a low value, cheap exports
• high interest rate