Week 7 - balance of payments

Question 1

What makes up the current account of the balance of payments?

Answer 1

1 Net balance of trade in goods. 2. Net balance of trade in services. 3. Net primary income - includes interest, profits, remittances and dividends. 4. Net secondary income - includes transfers such as overseas aid.

Question 2

What is (X-M)?

Answer 2

Net trade balance

Question 3

How will FDI be shown?

Answer 3

FDI flowing into a country will be a surplus on the financial account but the outflow of the firm’s profits back to its home country is counted as a deficit on the current account

Question 4

What is included in the capital account?

Answer 4

1. Sale/transfer of patents, copyrights, leases and other contracts. 2. Debt forgiveness - counted as a negative in this account

Question 5

What is included in the financial account?

Answer 5

1. Net balance of FDI. 2. Net balance of portfolio investment flows, such as inflows/outflows of debt and equity. 3. Balance of banking flows e.g hot money flowing in/out of a country’s commercial banking system. 4. Changes to the value of the reserves of gold and foreign currency

Question 5

Give two causes of a current account surplus

Answer 5

1. 1A large surplus of savings over investment for households, firms and government. 2. A large positive gap between exports and imports 3. An export surplus may be the result of high world oil prices for export of commodities such as oil.

Question 6

What are expenditure switching policies?

Answer 6

Policies designed to change the relative prices of exports and imports

Question 6

Give two causes of a current account deficit

Answer 6

1. Poor price and non price competitiveness e.g. causes by low levels of investment. 2. Strong exchange rate - increases the prices of exports. 3. High propensity to consume by consumers.

Question 7

Give an example of a expenditure switching policy

Answer 7

Exchange rate deprecation out to make imports more expensive

Question 8

What is an expenditure reducing policy

Answer 8

Policies designed to lower real income and reduce AD thereby cutting spending on imports

Question 9

Give an example of a expenditure reducing policy

Answer 9

Higher direct taxes; higher interest rates

Question 10

One expenditure switching policy is to impose tariffs. What is the Ev for this?

Answer 10

Risk of retaliation

Question 11

One expenditure reducing policy is to cut the real level of government spending. What is the Ev of this?

Answer 11

Could damage short term economic growth, risk that fiscal austerity hits investment

Question 12

What are trade imbalances?

Answer 12

Persistent current account surpluses for some countries contrasted with current account deficits for others

Question 13

Why do global trade imbalances matter for those countries with a current account deficit?

Answer 13

Run up large external debts and become reliant on foreign capital; may lead them to switching to protectionist policies.

Question 14

Why do trade imbalances matter for surplus countries?

Answer 14

They are saving more than they spend = they are depressing economic demand and growth.