The Balance of Payments

Question 1

What causes a CA deficit in terms of UK price competitiveness?

Answer 1

A lack of UK price competitiveness: high price of UK exports (due to inflation in the UK), cheap imports from low-wage countries and high ER value of sterling which leads to the price of exports increasing.

Question 2

What causes a CA deficit in terms of UK non-price competitiveness?

Answer 2

A lack of UK non-price competitiveness: poor quality or reliability of UK goods, low levels of technological innovation and low levels of branding.

Question 3

What causes a CA deficit in terms of the business cycle?

Answer 3

Changes in the business cycle both in the UK and abroad - if there is a domestic boom then consumption, investment and government spending increase which means imports are sucked into the UK and if there is a recession abroad then there is a fall in demand for UK exports.

Question 4

What causes a CA deficit in terms of raw materials?

Answer 4

A surge in raw material prices as demand is often inelastic.

Question 5

What is appreciation?

Answer 5

An increase in the value of a currency compared to another.

Question 6

What is deprecation?

Answer 6

A decrease in the value of a currency compared to another.

Question 7

What is the internal pound affected by?

Answer 7

Inflation

Question 8

What is the external pound effected by?

Answer 8

Exchange rate between different foreign currencies.

Question 9

What is a disadvantage of a CA surplus in terms of dependence on other countries?

Answer 9

It means that you are dependent on other countries to buy your goods which means that in times of recession, this can be dangerous.

Question 10

What is a CA deficit associated with?

Answer 10

An economic boom.

Question 11

What is the effect of a CA deficit on output and the price level?

Answer 11

The deficit would shift AD left which means that output falls and so does the price level.

Question 12

What effect do low exports have on the exchange rate?

Answer 12

If exports are low then this means that the demand for the pound is low which causes the exchange rate to fall.

Question 13

What is an evaluation point about exports affecting the exchange rate?

Answer 13

There are many things that affect the exchange rate so this might not necessarily cause it to change.

Question 14

What are some evaluation points about how a depreciation of the pound will affect the CA?

Answer 14

Consider the size of the depreciation, if exports have an elastic PES then due to capacity constraints exports may not be able to rise in the short run and it depends on which currency the pound is depreciating against.

Question 15

What does a CA deficit imply?

Answer 15

A net withdrawal from the circular flow of income.

Question 16

What does a CA deficit imply and what is the effect of this?

Answer 16

A net withdrawal from the circular flow of income which shifts AD left and leads to lower growth and higher unemployment.

Question 17

What is labour a derived demand for?

Answer 17

Output

Question 18

Why is a CA deficit bad in terms of inflation?

Answer 18

It causes deflation.

Question 19

Why is a CA deficit a bad thing in terms of reliance on foreign markets?

Answer 19

It means that we rely on foreign markets to supply our goods and services.

Question 20

Why is a CA deficit good in terms of goods and services?

Answer 20

It enables us to access a wider variety of goods and services at a cheaper price.

Question 21

Why might whether the CA deficit is good or not depend on what we import?

Answer 21

If we are importing consumer goods then this is generally bad however if we are importing raw materials/capital goods then it could actually improve the growth potential of the UK.

Question 22

How might UK firms respond to a fall in domestic consumption?

Answer 22

By targeting foreign markets more aggressively.