Macro - Balance Of Payments (BOP)

Question 1

Component of the balance of payments

Answer 1

Current Account

Capital Account

Financial Account

Question 2

The current account

Answer 2

Trade in goods – This is the value of goods going out of the country (exports of goods) minus the value of goods coming into the country (imports of goods).

Trade in services – This is the value of services going out of the country (exports in services) minus the value of services coming into the country (imports in services).

Income – This is often in the form of remittances. Therefore net income would be the income sent back to the domestic country by workers working abroad – the income sent to foreign countries from workers working in the domestic country.

Transfers – This includes payments such as EU fees or aid contribution.

Question 3

Balance of trade (goods & services)

Answer 3

Current account deficits and surpluses

A trade deficit occurs when a country’s total import cost exceeds the value of their export revenue. On the other hand, a trade surplus occurs when the country’s export revenue exceeds the cost of their imports.

Question 4

What’s the relationship between current account imbalances and other macroeconomic objectives?

Answer 4

main impact of a current account deficit is the effect that it has on aggregate demand. As net trade is a component of AD, a trade deficit will cause a reduction in AD and therefore economic growth. This is because there is less demand for domestic goods/services.

Question 5

Interconnectedness of economies through international trade

Answer 5

International trade has meant countries have become interdependent. Therefore, the economic conditions in one country affect another country, since the quantity they export or import will change.