BoP Current Account Surplus

Question 1

What does a large, persistent current account surplus result from

Answer 1

• a large soulful of savings over investment
• large gap between exports and imports
• export surplus may be the result of very high prices for exports of commodities
• the surplus is not necessarily the result of a country achieving a high level of price and non-price competitiveness

Question 2

Consequences of a current account surplus

Answer 2

• net inflow of foreign currency into their economic system
• deficit can be run on the capital account
• current account surplus countries nearly always have a strong XR as a result

Question 3

Evaluative points of a current account surplus

Answer 3

• trade imbalances have become a key feature of the world economy
• current account balance are neither good not bad in themselves
• it is important to analyse how deficits or surpluses are used

Question 4

Define: balance of payments imbalances

Answer 4

Persistent trade deficits or surpluses

Question 5

Define: current account surplus

Answer 5

Net external trade and income is positive

Question 6

Define: current account deficit

Answer 6

The amount by which money relating to trade, investment income and transfers going out of a country is more than the amount coming in

Question 7

Define XR index

Answer 7

The trade-weighted value of a currency

Question 8

Define: financial flows

Answer 8

Flows of capital across national borders

Question 9

Define: excess savings

Answer 9

When gross national savings > investment

Question 10

Define capital account (BoP)

Answer 10

Balance of investment flows

Question 11

Define depreciation

Answer 11

Fall in the external value of a currency

Question 12

Define the Marshall Lerner condition

Answer 12

A devaluation of a currency improves the BoP only if the combined (or sum of) PED for imports & exports are greater than one