4.1.7 Balance Of Payments

Question 1

What is the BoP?

Answer 1

A record of all the financial transactions that occur between it and the rest of the world

Question 2

What are the two main sections of the BoP?

Answer 2

• a current account
• a financial and capital account

Question 3

What is the current account?

Answer 3

• trade in goods
• trade in services
• current transfers

Question 4

What is the financial and capital account?

Answer 4

All transactions related to savings, investment and currency stabilisation

Question 5

Money flowing into a country is recorded in the relevant account as…

Answer 5

A credit (+)

Question 6

Money flowing out a country is recorded in the relevant account as…

Answer 6

A debit (-)

Question 7

What are goods referred to as?

Answer 7

Visible imports/exports

Question 8

What are services referred to as?

Answer 8

Invisible imports and exports

Question 9

What does net income consist of?

Answer 9

Income transfers by citizens and corporations
- credits are received from UK citizens who are abroad and send remittances home
- debits are sent by foreigners working in the UK back to their countries

Question 10

What is the capital account?

Answer 10

Records small capital between countries
- e.g debt forgiveness by the govt towards developing countries
- e.g capital transfers by migrants as they emigrate and immigrate

Question 11

What is the financial account?

Answer 11

Records the flow of all transactions associated with changes of ownership of the UK’s foreign financial assets and liabilities

Question 12

What does the financial account include?

Answer 12

• FDI
• portfolio investment
• financial derivatives
• reserve assets

Question 13

FDI

Answer 13

• flows of money to purchase a controlling interest in a foreign firm
• money flowing is in recorded as a credit and money flowing out is a debit

Question 14

Portfolio investment

Answer 14

• flows of money to purchase foreign company shares and debt securities (govt and corporate bonds)
• money is flowing in is credit and out is debit

Question 15

Financial derivatives

Answer 15

• financial instruments which investors use to speculate and return a profit
• money in is credit and out is debit

Question 16

Reserve assets

Answer 16

• assets controlled by the Central Bank and available for use in achieving the goals of monetary policy
• gold, foreign currency positions at the IMF, and foreign exchange held by Central Bank

Question 17

Factors that could cause a current account deficit

Answer 17

• lack of competitiveness of goods and services
• higher costs
• higher inflation rates
• high economic growth
• stronger pound

Question 18

Lack of competitiveness

Answer 18

• may be due to price of goods being more expensive than competitors -> due to higher wages
• may be due to lack of productivity -> lower output per worker due to lack of education and training. Lower standard of management can also cause low productivity
• or due to lack of investment by UK firms -> this could be due to higher interest rates and not a close relationship between banks and firms, OR lack of macroeconomic stability -> firms fall behind in tech and productivity

Question 19

Higher costs

Answer 19

• tighter regulations on environment, working practises, health and safety

Question 20

Higher inflation rates

Answer 20

• less macroeconomic stability, higher inflation rates make goods more expensive -> discourages investment

Question 21

High economic growth

Answer 21

• increasing avg incomes leads to higher demand for imports
• imports could be cars, holidays etc
• increases MPM (marginal propensity to import)

Question 22

Stronger pound

Answer 22

• cheaper imports, exports more expensive
• UK goods become less competitive

Question 23

Causes of a current account surplus

Answer 23

• high competitiveness
• weaker exchange rate
• high savings ratio

Question 24

High competitiveness

Answer 24

• countries with surplus are more competitive in terms of low unit labour costs as higher productivity and/or lower wages in terms of other economies
• benefit from EoS
• allocatively and productively efficient

Question 25

Weaker exchange rate

Answer 25

- cheaper exports, expensive imports - increases competitiveness - can be achieves by levels of currency intervention by nation's central bank, ie selling their own currency and accumulating reserves of foreign currency

Question 26

High savings ratio

Answer 26

- increased saving means reduced demand for imports - it means more money is held with financial institutions, e.g banks and this money can be lent by banks to firms for investment purposes