MACRO - LS2 - Measures Of Economic Preformance (Part 3)

Question 1

What is the balance of payments

Answer 1

Record of payments between one country & the rest of the world over a period of time between financial agents

Question 2

What is the balance of payments made up of

Answer 2

• current account
• financial account
• capital account

Question 3

What’s the current account and what’s it made up of

Answer 3

Records trade in goods, services, investments, income and transfers
- Trade in goods
- Trade in services
- Primary income
- Secondary income

Question 4

Trade in goods

Answer 4

• known as visibles - tangible products being traded across borders

Question 5

Trade in services

Answer 5

Intangible products known as invisibles
E.g. export could be foreign tourists staying in London hotel or foreign companies buying British insurance
E.g. importing could be British national paying for holiday abroad e.g. Spain

Question 6

Primary income

Answer 6

Results from the loan of factors of productions abroad
For UK mainly interest profits and dividends on assets owned aborad

Question 7

Secondary income / transfers

Answer 7

Transfer of money from a person to another
Also government transfers to organisations like the EU

Question 8

BALANCE OF TRADE EQUATION

Answer 8

= Exports - Imports

Question 9

CURRENT BALANCE EQUATION

Answer 9

= Balance of trade + balance of primary & secondary income

Question 10

Exports

Answer 10

• inward flow of money
• shown with positive sign

Question 11

Imports

Answer 11

• Outward flow of money
• shown with negative sign

Question 12

Trade surplus

Answer 12

When a country’s exports revenue exceeds cost of their imports

Question 13

Trade deficit

Answer 13

When a country’s total import exceeds value of their export revenue

Question 14

UK Balance of payments

Answer 14

• deficit consistently since 1984 - all time high in 2016
  Generally negative goods and positive services

Question 15

Reasons for a larger UK trade deficits 2022-2023

Answer 15

• export growth has earned - UK businesses claim that exports to EU are being hampered by non-tarrif barriers after leaving EU
• Higher global prices for essential imports - such as crude oil p/natural gas surged in 2021-22
• Currency weakness - external value of the pound against the Euro and dollar fell sharply in latter part of 2022

Question 16

Possible consequences of current account deficit

Answer 16

Currency weakness - can put pressure on sterling to depreciate, can cause imports to be more expensive, contributes to inflationary pressures and falling real incomes
Slower economic growth - represents net outflow from circular flow of income - reduces AD and acts as a drag on short run GDP growth
Need to attract capital flow - it requires net capital/financial inflow to finance deficit, may cause central bank to raise interest rates

Question 17

Conflict between current account imbalances and macro objectives

Answer 17

Economic growth comes from increase in consumption/spending leading to increase demand of imports resulting on decline in current account

Question 18

Two types of causes for current account deficit

Answer 18

• cyclical causes
• structural causes

Question 19

Cyclical causes

Answer 19

• overvalued exchange rate
• boom in domestic demand
• recession in key export industries
• slump in global prices of exports
• increased demand for imported technology
• increase in global energy/commodity prices (for net importers)

Question 20

Structural causes

Answer 20

• under-investment
• relatively low productivity
• persistently high relative inflation
• inadequate R&D, innovation
• emergence of low-cost competition (emerging markets)
• increase in global energy/commodity prices (for net exporters)