Topic 3-balance Of Payments

Question 0

Open economy

Answer 0

Trade internationally

Question 1

Is the UK an open or closed economy?

Answer 1

Trade internationally so our economy is open

Question 2

Closed economy

Answer 2

Self sufficient trade within a country

Question 3

Bop (balance of payments)

Answer 3

Is a record of all the external financial transactions between one economy and the rest of the world

Question 4

Examples of trade in goods/visibles

Answer 4

Raw materials, manufactured goods, cars

Question 5

Examples of trade in services/invisibles

Answer 5

Banking, insurance, transport

Question 6

Example of investment income

Answer 6

Profits,dividends and interest on assets abroad

Question 7

What is X and M

What’s X-M

Answer 7

• X is the revenue earned from selling our exports
• M is our expenditure on Imports

-X-M is the bop ( exports)

Question 8

Info about strong pound

Answer 8

-buys more money
-makes imports cheaper
-makes exports expensive
M: increases
X: Decreases
X-M: becomes more negative
Deficit increases

Question 9

Info about weak pound

Answer 9

-Buys less money
-makes imports expensive
-makes exports cheaper
M: decreases
X: Increases
X-M: becomes more positive
Deficit decreases

Question 10

Reason bop has reduced

Answer 10

• strength of the pound
• strong U.K. Growth
• persistent decline in manufacturing

Question 11

Equilibrium

Answer 11

Balance in imports and exports

Question 12

Deficit

Answer 12

When more money is flowing out of an economy than is flowing in

Question 13

Surplus

Answer 13

When more money is flowing into an economy than out

Question 14

How can a current account deficit not be a problem?

Answer 14

• If the current account deficit is small and sustainable then it is not a problem because the domestic economy can fund it
• can be a sign of economic growth because economic growth means income and consumers buy more goods

Question 15

How can a current account deficit be a problem?

Answer 15

• If there is a large and persistent current account deficit, creditors may deem the economy more risky as there is a higher chance of default
• could be a sign of recession (economy is not producing enough exports) or has poor quality goods so low demand for exports

Question 16

Depreciation

Answer 16

Is when the pound falls in value or is going to fall in value

Question 17

Causes of a current account surplus

Answer 17

• the currency is too weak relative to other countries
• low rates of inflation relative to other countries
• low wage costs relative to other countries
• low level of growth in a country, making It difficult to buy Imports from abroad and creating a strong incentive for firms in the country to export

Question 18

Causes of current account deficit

Answer 18

• high rates of inflation relative to other countries
• high wages relative to other countries
• high level of growth, meaning people with higher incomes tend to buy more imports from abroad

Question 19

Balance of payments

Answer 19

A set of accounts. Showing the transactions conducted between residents of a country and the rest of the world

Question 20

Exchange rate

Answer 20

The price of the currency in terms of another

Question 21

Current account transactions

-balance in trades of goods and services

Answer 21

• trade in goods is normally negative
• trade in services is positive flor as the Uk earns strong credits from it financial services
• imports+exports

Question 22

Current account transactions

-investments

Answer 22

-dividends, profit and interest receipts from UK ownership of oversea assets

Question 23

Current account transactions

-international transfers

Answer 23

• transfers through government e.g transactions and grants with international organisations
• transfers made or received by private individuals

Question 24

Bop separated into 3 categories

Answer 24

• capital account
• current account
• financial account

Question 25

Demand ️and supply diagram

Answer 25

Exchange rate 
(€ per £) 

Quantity of points per period