Theme 2- Balance of payments (key terms)

Question 1

Balance of payments

Answer 1

A set of accounts showing the transactions between residents of a country and the rest of the world - sets out exports, imports, and flows of money

Question 2

Current account

Answer 2

a) the imports&exports of goods and services
b) net income payments received from/paid to abroad
c) government transfers (international aid money we pay to the EU)

Question 3

Financial account

Answer 3

The financial account includes any trade of Foreign Exchange reserves as well as the buying and selling of assets held in different countries

Question 4

Balance of Trade

Answer 4

Exports minus imports of physical goods as well as invisible services

Question 5

Capital account

Answer 5

• Records small capital flows between countries and is relatively inconsequential
• Includes effects of debt forgiveness, capital transfers etc

Question 6

Cyclical trade deficit

Answer 6

A trade deficit that arises purely due to changes in the business cycle, for example many countries run a trade deficit when strong growth increases demand for imports

Question 7

Hot money

Answer 7

Money that flows freely and quickly around the world looking to earn the best rate of return. Might be invested in any asset whose value is expected to rise (e.g. property or shares) or placed in an account offering the best real rate of interest

Question 8

Net primary income

Answer 8

Part of the current account of the balance of payments, it measures the net flow of profits, interest and dividends from investments in other countries and net remittance flows from migrant workers

Question 9

Net secondary income

Answer 9

Part of the current account of the balance of payments, it includes overseas aid / debt relief, military grants and (for the UK) net payments to the European Union

Question 10

Remittances

Answer 10

Sending money to people in another country. For many lower-income nations, remittance income is now a big contribution to their Gross National Income (GNI)

Question 11

Structural trade deficit

Answer 11

A trade deficit that arises due to supply-side weaknesses rather than a change in GDP or currency –usually caused by poor price and non-price competitiveness.

Question 12

Overseas assets

Answer 12

Assets such as businesses, shares, property owned in overseas countries and which might generate a flow of primary income which is a credit item on the current account