The balance of payments

Question 1

what is the current account balance?

Answer 1

measures the difference between money and credit going in and out of an economy (through exports imports and income paid on assets both home and abroad)

Question 2

what is the current account surplus?

Answer 2

net extremal trade and income is positive

Question 3

what is the current account deficits?

Answer 3

net external trade and income is negative leading to a net outflow of demand from the circular flow

Question 4

what is the effective exchange rate index?

Answer 4

trade weighted eternal value of a currency

Question 5

what are financial flows?

Answer 5

flows of capital across national borders including debt and equity

Question 6

what are excess savings?

Answer 6

when gross national savings are greater than gross capital investment

Question 7

what is the capital financial account?

Answer 7

balance of investment flows into nd out of a country

Question 8

what does the current account consist of?

Answer 8

• balance of trade in goods
• balance of trade in services
• net primary income (interest profit dividends etc.)
• net secondary income (transfers i.e. contributions to EU)

Question 9

what is the capital account?

Answer 9

• sale/transfer of patents, copyrights, franchises, lease and other transferrable contracts
• debt forgiveness
• capital transfers of fixed assets

Question 10

what is the financial account?

Answer 10

include transactions that result in a change of ownership of financial assets and liabilities between UK residents and non-residents

Question 11

what does the financial account consist of?

Answer 11

• net balance of FDI
• net balance of portfolio investment flows
• balance of banking flows
• changes to the value of reserves of gold and foreign currency

Question 12

what is FDI?

Answer 12

investment from one country into another that involves establishing operations or acquiring tangible assets including takes in other businesses

Question 13

what is inward and outward FDI and their effects on UK accounts?

Answer 13

• inward is another business from another country setting up operations in the UK which is positive for UK accounts
• outward is a UK firm setting up abroad which is negative for the UK BOP

Question 14

causes of a deficit on the BOP?

Answer 14

• high levels of consumer spending (low savings rate)
• its struggling to compete internationally
• it has to deal with external shocks ( e.g. world prices of raw materials)

Question 15

causes of a surplus on the BOP?

Answer 15

• economy is experiencing a recession
• domestic currency has low value
• high interest rates are causing more savings and less spending

Question 16

consequences of a deficit on the BOP?

Answer 16

• indicates an economy is not competitive
• people are wealthier and have a higher standard of living
• fall in value of currency in the short run
• job losses domestically

Question 17

consequences of a surplus on the BOP?

Answer 17

• shows and economy is competitive
• surplus for a prolonged period may cause stagnation due to low demand thy may experience low or negative growth.
• overreliance on exports
• surplus created by undervalued currency means that inflation may rise

Question 17

what is stagnation?

Answer 17

due to low demand they may experience low or negative growth.