2.1.4 - Balance of payments

Question 1

Define Balance of Payments Account

Answer 1

. Records all financial transactions made between consumers, businesses and government in one country with OTHER countries

. Inflow of foreign currency are counted as positive entry (means exports sold to other countries)

. Outflow of foreign currency are counted as negative entry (means imported goods and services)

Question 2

Name two components of Balance of Payment of Account

Answer 2

. Current Account

. Capital and Financial Account

Question 3

Define Current Account

Answer 3

Measures the total value of export revenue and import expenditure of trade in goods & services, investment income and current transfers

Question 4

Define Capital and Financial Account

Answer 4

Where flows of money associated with saving, investment and currency stabilisation are recorded

Question 5

Four Parts of Current Account

Current Account is Part of Balance of Payments

Answer 5

. Trade in goods
. Trade in Services
. Primary Income
. Secondary Income

Question 6

Explain Trade in Goods

Part of Current Account

Answer 6

. Refers to trade in raw materials, semi - manufactured goods and finished manufactured goods

. Also called trade in visible

. Visible exports result in an inward flow of money and record with a positive sign on the balance of payments account.

. Visible imports result in an outward flow of money and recorded with a negative sign on the balance of payments account

. Balance of trade is the difference between visible exports and visible imports

Question 7

Explain Trade in Services

Part of Current Income

Answer 7

. Trade in services also called invisible trade

. Refers services such as banking, insurance, tourism, transport, education and healthcare

. Invisible imports result is money flowing abroad hence they are called debits on the BoP

Question 8

Define Primary Income

Part of Current account

Answer 8

The result of loaning out factors of production abroad

Refers to profit, dividends and interest earnings on UK assets loaned by foreigners.

Question 9

Define Secondary Income

Part of Current account

Answer 9

. Refers to transfers of money by governments

. Transfers of money by governments e.g. foreign aid

. Transfers of money by individuals e.g. remittances

Question 10

Define Current Account Balance

Answer 10

The difference between value of exports and imports

. Calculated by adding balance of trade in goods, services, income and current transfers

. There can be surplus or deficit

Question 11

Define Current Account Surplus

Answer 11

When the value of exports is greater than the value of imports

. The money flowing into the country trade in goods, services, primary income and secondary income are greater than money flowing out of the country from these transactions

Question 12

Define Current Account Deficit

Answer 12

. When the value of imports are greater than the value of exports

. Money flowing out of the economy in goods, services, primary and secondary income is greater than the money flowing into of the country from these transactions

Question 13

Explain Relationship between Current Account Imbalances and macroeconomic objectives

Answer 13

Few Macroeconomic objectives:

. Low unemployment
. Balance of payments equilibrium
. Economic Growth
. Low, stable inflation

. Economic growth is caused by an increase in consumption. This increases the demand for imports, which deteriorates the current account on the BoP

. Governments like to to export - led economic growth, which would reduce unemployment and improve the current account on the BoP. However, this would cause demand - pull inflation