MACRO 3 - Jamie

Question 1

What is the Balance of Payments?

Answer 1

A record of a country’s trade/transactions with the rest of the world.

Question 2

What are the three accounts of the Balance of Payments?

Answer 2

Current account
Financial account
Capital account

Question 3

What types of transactions are recorded in the current account?

Answer 3

Trade in goods
Trade in services
Investment income (primary income)
Transfers (secondary income)

Question 4

What is trade in goods?

Answer 4

• Measures the net exports of visible goods
• UK has traditionally run a large deficit on the trade in goods component because:
• an increase in demand for consumer goods, raising amount of imported goods
• decline in the UK manufacturing sector as secondary production is outsourced to low wage countries
• lower production of primary materials
• a strong currency makes imports more affordable and exports less attractive

Question 5

What does SPICED mean?

Answer 5

Strong
Pound
Imports
Cheap
Exports
Dear

As the pound strengthens imports are cheaper but exports are less attractive.

Question 6

What is trade in services?

Answer 6

• Measures the net exports of invisible items
• Uk has run a large surplus on trade in services because:
• UK has seen a shift towards the tertiary sector
• UK can offer better services at a lower cost
• London is one of the world’s prime financial centres

Question 7

What is investment income?

Answer 7

Primary income is generated by UK owned overseas assets

Question 8

What are transfers?

Answer 8

Payments made (or received), usually by the government, to or from other countries with no exchange.
The main transfers are:
-EU payments
-Foreign Aid
-Remittances

Question 9

Why is there a deficit on the current account?

Answer 9

Rising demand for imported goods
Uk becoming less competitive in the manufacturing of goods
Exchange rate is too strong
Unbalanced economy

Question 10

How to redress the balance?

Answer 10

Controlling consumer spending will reduce the demand for imports
Investing in the supply-side
Depreciation of the exchange rate
Improve overall macroeconomic condition in the UK

Question 11

What are the factors that influence a country’s current account?

Answer 11

Improving productivity - lowering unit costs
Inflation - making exports less attractive
Exchange rate - exports become more expensive as the pound strengthens
Economic activity in another country - strong neighbours pull each other’s economies up