4.2.6 International Economy

Question 1

What is the balance of payments?

Answer 1

Record of all the financial transactions that occur between a country and the rest of the world

Question 2

What are the 2 main sections of the balance of payments?

Answer 2

Current account
Financial account

Question 3

What does the current account refer to?

Answer 3

All transactions related to goods and services , along with payments related to the transfer of income

Question 4

What does the financial account and capital account refer to?

Answer 4

All transactions related to savings , investment and currency stabilisation

Question 5

What does the current account comprise?

Answer 5

Trade in goods and services and primary and secondary income

Question 6

What does the current account record?

Answer 6

Net income that an economy gains from international transactions

Question 7

What was the balance of trade in goods in 2017?

Answer 7

£-32.9bn

Question 8

What was the balance of trade in services in 2017?

Answer 8

£27.9bn

Question 9

What was the total current account balance in 2017?

Answer 9

£-10.7bn

Question 10

What do net incomes consist of?

Answer 10

Income transfers by citizens and corporations

Question 11

How do credits work in current account?

Answer 11

Received from UK citizens who are abroad and send remittances home

Question 12

How do debits work in current account?

Answer 12

Sent by foreigners working in the UK back to their countries

Question 13

What are current transfers?

Answer 13

Payments at government level between countries

Question 14

What does the capital account record?

Answer 14

Small capital flows between countries and is relatively inconsequential

Question 15

What are the two main sections of the capital account?

Answer 15

Capital transfers
Transactions in non-produced , non- financial assets

Question 16

What are capital transfers?

Answer 16

Small flows of money between countries

Question 17

Give examples of capital transfers?

Answer 17

Debt forgiveness payments made from government to developing countries

Capital transfers by migrants as they migrate or immigrate

Question 18

What are transactions in non-produced , non-financial assets?

Answer 18

Small payments usually associated with royalties or copyright

Question 19

What does the financial account record?

Answer 19

Flow of all transactions associated with changes of ownership of the country’s foreign financial assets and liabilities

Question 20

What are the 4 main sections of the financial account?

Answer 20

Foreign direct investment
Portfolio investment
Official borrowing
Reserve assets

Question 21

What is FDI?

Answer 21

Flows of money to purchase a controlling interest in a foreign firm

Question 22

What is portfolio investment?

Answer 22

Flows of money to purchase foreign company shares and debt securities

Question 23

What is official borrowing?

Answer 23

Government borrowing from other countries or institutions outside of their own economy

Question 24

What are reserve assets?

Answer 24

Assets controlled by the central bank and available for use in achieving the goals of monetary policy

Question 25

Give an example of a reserve asset?

Answer 25

Gold

Question 26

How do the current account balance and the capital account balance vary?

Answer 26

If the current account balance is positive, then the capital/financial account balance is negative

Question 27

Why is current acc positive if capital acc is negative?

Answer 27

BOP means that the capital account and the current account should balance

Question 28

What are the 3 factors that influence a country's current account?

Answer 28

Productivity Exchange rates Inflation

Question 29

How can increased productivity affect the current account?

Answer 29

Supply - side policy such as education or healthcare improve output of workers resulting in increasing export volumes

Question 30

How can high inflation affect the current account?

Answer 30

High rates of inflation relative to trading partners, can make exports expensive for foreign markets and imports cheaper for domestic consumers

Question 31

How can low inflation affect the current account?

Answer 31

Low inflation or deflation relative to trading partners, can make exports cheaper in foreign markets and imports more expensive for domestic consumers

Question 32

How can appreciation in exchange rate affect current account?

Answer 32

Exports become relatively more expensive for foreign buyers, potentially leading to a decrease in export volumes and increase in import volumes as they get cheaper for domestic consumers

Question 33

How can depreciation in exchange affect current account?

Answer 33

Exports become relatively cheaper for foreign buyers, leading to an increase in export volumes and imports become expensive for domestic consumers, which may decrease in import volumes

Question 34

What does the financial account measure?

Answer 34

Inflows and outflows of financial assets, including foreign direct investment and portfolio investment

Question 35

How can an inflow of FDI impact the exchange rate?

Answer 35

Increases the demand for the country's currency, potentially leading to an appreciation of the exchange rate

Question 36

How does an outflow of domestic investment to other countries affect exchange rate?

Answer 36

Increases supply of the country's currency in the foreign exchange market, potentially leading to a depreciation of the exchange rate

Question 37

How can a stronger exchange rate influence the attractiveness of foreign investment?

Answer 37

Makes foreign investments more expensive in terms of the investor's home currency, potentially reducing the appeal of investing in that country.

Question 38

How can a weaker exchange rate influence the attractiveness of foreign investment?

Answer 38

Can make a country's assets more affordable for foreign investors, potentially increasing the attractiveness of investing in that country