Balance Of Payments

Question 1

What is the Balance of Payments?

Answer 1

Record of a country’s transactions with the rest of the world

Question 2

What does the Balance of Payments show?

Answer 2

• Receipts from trade
• Consists of the current and financial account
• Represented by the X-M component of AD

Question 3

What is it called if the payment into a country is greater than the payments going out?

Answer 3

Balance of Payments current account surplus

Question 4

What is it called if the payments out of the country are greater than the payments coming in?

Answer 4

Balance of Payments current account deficit

Question 5

What is the current account?

Answer 5

Record of all payments for trade in goods and services plus income flow. Divided into 4 components

Question 6

What are the 4 components of the current account?

Answer 6

• Balance of trade in goods (visibles)e.g. cars
• Balance of trade in services (invisibles)e.g.Tourism
• Net income flows:Primary income flows (wages)
• Net current transfers:Secondary income flows (oversea aid)

Question 7

An example of Primary income? (Credit +)

Answer 7

Investment incomes. Income received on foreign direct investment (FDI)

Question 8

Give an example of FDI? (Credit +)

Answer 8

If a UK company such as BP earn profits from its operations in India. This is a credit (+) for the UK on the current account

Question 9

An example of primary income (Debit -)?

Answer 9

Wages, UK companies like BP pay UK workers who work for them abroad, this leads to money leaving the UK and is a debit - on the current account

Question 10

What does secondary income represent?

Answer 10

“Something for nothing”

Question 11

What is a remittance?

Answer 11

A remittance is money sent to another party, usually one in another country.

Question 12

Give an example of a remittance?

Answer 12

Immigrant workers earn money in the UK but send much of it back to their home countries

Question 13

What is the impact of inward FDI on the balance of payments for UK example (Inward FDI = Tata (India) buying JLR; Chinese investors buying Aston Villa)?

Answer 13

1) Initial Impact, a big one-off CREDIT(+) on the financial account
2) Subsequent impact, a continuous DEBIT(-) on the current account as profits made in the UK flow back to India and China

Question 14

Name a reason for why the trade deficit often begins to rise quickly after a recession?

Answer 14

In a boom we spend more and much of what we buy is expensive imported goods e.g. iPhones and cars. Also, in recessions, labour costs may fall, making UK goods cheaper to produce so making exports more competitive

Question 15

Name a few situations where running a current account deficit may be a problem for the UK?

Answer 15

• Persistent deficit that is continuously growing, never self-correcting
• The deficit forms a large share of GDP

Question 16

Imbalances occur when the…

Answer 16

…difference between imports/exports becomes higher than expected

Question 17

What can these imbalances be caused by?

Answer 17

Structural (long-term) or temporary (short-term) factors

Question 18

An example of a structural imbalance?

Answer 18

UK are excellent at services but aren’t on goods compared to other low wage countries mass producing goods

Question 19

An example of temporary imbalance?

Answer 19

Most commonly caused by changes in the economic cycle or changes in the exchange rate

Question 20

What are the factors a current account deficit could be caused by?

Answer 20

1) Economic Growth/Consumer spending
2) Exchange rate
3) Competitiveness of exports between countries. Less competitive could lead to increase in current account deficit

Question 21

International trade

Answer 21

This is the exchange of goods and services across international borders

Question 22

Absolute advantage

Answer 22

This is when a country can produce a good or service using fewer resources and at a lower cost than another country

Question 23

Comparative advantage

Answer 23

This occurs when a country can produce a good or service at a lower opportunity cost than another country

Question 24

Benefits from trade

Answer 24

• Exports increase national income
• Imports are often of goods that cannot be produced in an economy
• Increased consumer choice
• Stimulates innovation

Question 25

Innovation

Answer 25

Defined as the process of translating an idea or invention into a good or service that creates value for which consumers will pay

Question 26

Businesses innovate in order…

Answer 26

…to gain a competitive advantage

Question 27

Through…more output is produced using the…………. Therefore the cost per unit is …

Answer 27

1) Specialisation
2) Same amount of Resources
3) Reduced

Question 28

What could lead to an increase in world output?

Answer 28

Using the theory of comparative advantage to apply specialisation techniques

Question 29

Importance of comparative advantage

Answer 29

• Combined output will be increased
• Underpinning principles of international trade
• Specialise in what we’re good at
• Specialisation means higher volumes economies of scale improvements in quality

Question 30

Comparative advantage may be due to:

Answer 30

• Non-renewable resources may run out
• Movements in the exchange rate - expensive
• Long-term rates of inflation may deviate-expensive