Balance of payments

Question 1

What are the three main elements to the BOP?

Answer 1

current account, capital account, financial account

Question 2

What does the current account record?

Answer 2

payments for trade in goods, trade in services, primary income, secondary income

Question 3

What is primary income?

Answer 3

investment income

Question 4

What is secondary income?

Answer 4

transfer payments (eg aid)

Question 5

What are the possible consequences of a current account deficit?

Answer 5

currency weakness (sterling depreciation)
slower growth ( outflow from the circular income)
need to financial account surplus (net capital financial inflows, FDI - might be good)
important symbol of relative competitiveness ( reflects some kind of imbalance - low investment, over- consumption)

Question 6

What was the UK current account deficit in 2023?

Answer 6

3.3%

Question 7

Can the UK finance a current account deficit?

Answer 7

yes - relatively attractive to financial inflows, however raise in corporation tax from 19% to 25% may start to bite

Question 8

What are the causes of a current account deficit?

Answer 8

• low productivity
• high value of currency
• high inflation
• rapid growth leading to increased imports

Question 9

What are the ways countries can reduce a current account deficit?

Answer 9

Expenditure reducing policies
Expenditure switching policies
Supply side policies

Question 10

What are some expenditure reducing policies?