2.1.4: Balance Of Payments

Question 1

What is balance of payments (BOP)?

Answer 1

A record of all transactions made between economic agents of one country and the rest of the world.

Question 2

What is counted as a positive entry in the BOP?

Answer 2

Inflows of money (e.g. exports).

Question 3

What is counted as a negative entry in the BOP?

Answer 3

Outflows of money (e.g. imports).

Question 4

Answer 4

Question 5

What are imports?

Answer 5

Goods/services brought in from overseas.

Question 6

What are exports?

Answer 6

Goods/services produced in the home country for sale overseas.

Question 7

What is visible trade?

Answer 7

The exchange of physically tangible goods between countries (e.g. coal, coffee beans).

Question 8

What is invisible trade?

Answer 8

The exchange of physically intangible services between countries (e.g. tourism, overseas banking transactions).

Question 9

What is the visible balance equation (balance of trade)?

Answer 9

Visible Exports - Visible Imports.
[Balance of trade in goods].

Question 10

What is the invisible balance equation (balance of invisibles)?

Answer 10

Invisible Exports - Invisible Imports.
[Balance of trade in services].

Question 11

What is income?

Answer 11

What is generated from loans of factors of production overseas (e.g. interest payments, profits, dividends).

Question 12

What are current transfers?

Answer 12

Government transfers to and from overseas (e.g. EU).

Question 13

A tourist going into the UK: ________ for UK. Money flows into the UK for an ________.

Answer 13

Export, export.

Question 14

What is a current account surplus?

Answer 14

Where exports are higher than imports.

Question 15

What is a current account deficit?

Answer 15

Where imports are higher than exports.

Question 16

Why might there be a current account surplus?

Answer 16

-Closed economy (usually through tariff and non-tariff barriers. Move to a low share of national income taken up by imports).
-High domestic savings rates and a low consumption rate of goods/services.
-Undervalued exchange rate (decreases price of exports to the rest of the world and boost competitiveness).

Question 17

Why might there be a current account deficit?

Answer 17

-Low productivity (companies become less competitive compared to overseas competitors).
-High inflation rate (exports become more expensive overseas).
-Dependancy on imports.
-Overvalued exchange rate (increases prices of exports to the rest of the world, decreasing competitiveness).

Question 18

What are the UK Government’s macroeconomic objectives?

Answer 18

-Full employment.
-Low, stable inflation.
-A sustainable current account on the balance of payments.
-Sustainable economic growth.

Question 19

Over time, the world economy has become more ________.

Answer 19

Interconnected.

Question 20

What factors have increased the interconnectedness of economies (leading to globalisation)?

Answer 20

-Growing proportion of internationally traded output of an individual economy.
-More people/firms owning assets overseas (e.g. shares, loans or businesses).
-Increasing ​migration​ between countries.
-Technology ​being shared on a faster basis.

Question 21

International trade has meant countries have become more ​________, so a change in the economic condition of one country will ________ another.

Answer 21

Interdependent, affect.