Price Stability and Satisfactory balance of payments

Question 1

What is inflation?

Answer 1

general rise in average prices across the economy. the rate of inflation is measured by the annual percentage change in consumer prices.

Question 2

What does inflation lead to?

Answer 2

a decline in the value of money

Question 3

When does inflation occur?

Answer 3

when most prices are rising by some degree across the whole economy.

Question 4

What is inflation’s target rate?

Answer 4

2%

Question 5

What is deflation?

Answer 5

negative inflation, which involves a falling average price level

Question 6

What is disinflation?

Answer 6

occurs when rate of inflation is falling but is still positive

Question 7

What is CPI?

Answer 7

official measure used to calculate the rate of consumer price inflation in the UK. gives a weighting to different goods depending on how important they are in a typical basket of goods

Question 8

What does the UK gov use CPI for the indexation of?

Answer 8

state pensions
welfare benefits
setting a monetary policy target

Question 9

Inflation rate calculation:

Answer 9

inflation rate= (CPI2-CPI1)/CPI1

Question 10

Limitations of CPI as a measure of inflation:

Answer 10

• not fully representative
• spending patterns
• changing quality of goods and services
• new products- CPI slow to respond

Question 11

definition of Balance of payments:

Answer 11

shows all the payments and receipts made between consumers,businesses and the government in one country with other nations, which involves the exchange of different national currencies.

Question 12

what are types of payments received from other countries:

Answer 12

inflow, credit, positive input, demand for domestic currency

Question 13

what are types of payments made to other countries:

Answer 13

outflow, deficit, negative input, supply of domestic currency

Question 14

what are the three components of BoP?

Answer 14

current account, financial account, capital account

Question 15

what are exports?

Answer 15

domestically produced goods or services sold to residents of other countries

Question 16

what are imports?

Answer 16

goods or services produced in other countries and sold to residents of this country

Question 17

what is a current account?

Answer 17

CA measures all the currency flows into and out of a country in a particular time period in payment for exports and imports, together with income and transfer flow

Question 18

what is balance of trade?

Answer 18

difference between the money value of a country’s import and exports. its the largest component of a country’s balance of payments on current account

Question 19

what is a balance of trade deficit?

Answer 19

money value of a country’s imports exceeds the money value of exports

Question 20

what is a balance of trade surplus?

Answer 20

money value of country’s exports exceeds the money value of imports

Question 21

what are the 4 components added together to create current account

Answer 21

1. trade in goods (visible trade)
2. trade in services (invisible trade)
3. income payments (primary income)
   
   • profits, dividends
   • employee income from abroad (remittance)
4. current transfers (secondary income)
   
   • transfer made or received by central gov and
     individuals
   • transfer from international organisations
     -tax n social contributions
     -bilateral aid flow, military grants

Question 22

if a country runs a current account deficit what does that mean?

Answer 22

debit is greater than credit. outflow of demand and income from country’s circular flow of income. aggregate demand will fall.

Question 23

if a country runs a current account surplus what does that mean?

Answer 23

debit is smaller than credit. inflow of demand and income from a country’s circular flow of income. aggregate demand will rise.

Question 24

whats the difference between trade deficit and current account deficit?

Answer 24

• trade deficit means value of imports is greater than value of exports
• CA deficit means outflow due to trade in goods and services, CA includes primary and secondary income are greater than inflow.
• trade is only a component of current account

Question 25

reasons for current account surplus

Answer 25

• export-oriented growth: strong international competitiveness
• strong income from overseas investment
• price factors
  
  • rise in price of exports, fall in price of imports
  • high interest rate
  • undervalued exchange rate

Question 26

reasons for current account deficit

Answer 26

• higher consumer spending on imports
• weak international competitiveness
• imposition of trade barriers by trading partner
• economic downturn in exporting destinations
• price factors
  
  • fall in price of exports, rise in price of imports
  • low interest rate
  • overvalued exchange rate
  • inflation

Question 27

what does current account deficit mean?

Answer 27

an economy is not paying its way in the global economy. means a country is drawing in money from elsewhere and as a consequence building up corresponding liabilities.

Question 28

what is financial account

Answer 28

FA records flow of money into and out of a country to pay for investments in capital, shares and loans

Question 29

4 components of financial account

Answer 29

1. foreign direct investment- foreign firm sets up factory…
2. portfolio investment- purchase of loans, shares, bonds
3. financial derivatives- financial instrument whose underlying value is based on another asset
4. reserve assets- gov transaction in foreign exchange reserve

Question 30

what is hot money

Answer 30

short-term investment or large sums of money moved by investors from country to country to in search of the best interest rates.
causes large change in the financial account balance

Question 31

what is capital account

Answer 31

flow of money into and out of a country to pay for a change of ownership of fixed assets or cancellation of debts.
size of cap acc are small compared to curr acc and fin acc.
largest amounts are due to transfer of fixed assets when overseas firms and workers move to UK

Question 32

what is satisfactory balance of payments?

Answer 32

country can only enjoy a trading surplus if at least one other country suffers a trading deficit.