Macro A2 - Balance Of Payments

Question 1

The current account and components

Answer 1

a country’s transactions with the rest of the world, which is used to measure the flow of goods, services, and investments between countries

Trade in goods
Trade in services
Investment income
Unilateral transfers

Question 2

The capital account

Answer 2

A record of all financial transactions between a country and the rest of the world.

Foreign Direct Investment
Portfolio investment (Stocks, Bonds)
Banking flows (Borrowing/lending between countries
Foreign Aid

Question 3

The financial account

Answer 3

A record of all financial transactions between a country and the rest of the world. The financial account measures changes in a country’s financial assets and liabilities, such as foreign investment in the country and a country’s investment abroad.

Question 4

Causes of deficits on the current account

Answer 4

Trading Imbalances
Low investment income
Increase foreign spending services
Unfavourable exchange rates
High levels of government spending
Demographic changes (Older generation)

Question 5

Causes of surpluses on the current account

Answer 5

Strong Exports
Favourable exchange rates
Low levels of imports
High level of investment income
Low levels of government spending
Demographic changes (young population)

Question 6

Measures to reduce a country’s imbalance on the current account

Answer 6

Encourage export growth
Improve competitiveness
Reduce demand for imports
Increase investment income
Manage Exchange rates

Question 7

The significance of global trade imbalances

Answer 7

Unequal distribution of exports and imports between different countries. These imbalances can have significant economic, political, and social consequences.

• Currency fluctuations
• Debt
• Unemployment
• Tension between trading partners
• Protectionist policies
• Income inequality