1.7 Balance of Payments

Question 1

What is the current account?

Answer 1

Measures value of exports vs value of exports within the BoP

Question 2

Components of the current account?

Answer 2

1) Goods
2) Services
3) Net primary income (factor incomes)
4) Net secondary income (transfer payments)

Question 3

Causes of a CA deficit?

Answer 3

1) Poor price competitiveness
2) Strong exchange rate
3) Recession in trade partners

Question 4

Effects of a CA deficit?

Answer 4

1) Loss of AD
2) Depreciation
3) Cost-push inflation

Question 5

Causes of CA surplus?

Answer 5

1) Price competitiveness
2) Poor exchange rate
3) Boom in trade partners

Question 6

Effects of a CA surplus?

Answer 6

1) Appreciation
2) Demand-pull inflation
3) Increased employment

Question 7

How does a CA deficit and surplus occur?

Answer 7

1) Leakages > Injections
2) Injections > Leakages

Question 8

What is the Marshall-Lerner Condition?

Answer 8

A depreciation will improve the trade balance if combined PED for imports and exports is greater than 1

Question 9

What is the J-Curve?

Answer 9

PED is likely to be inelastic in the short-run which can lead to a trade balance taking a while to improve