Balance Of Payments

Question 1

Definition of BoP

Answer 1

Record of all financial transactions between agents - business, government consumers from one country with another

Question 2

UKs current account position (2)

Answer 2

The UK has a surplus with services but a deficit with goods = net deficit
Import nation

Question 3

Causes of deficit/surplus (4)

Answer 3

Appreciation of pound = imports cheaper (SPICED)
Economic growth = income increase so demand increase = imports
More competitive = improve a deficit or increase surplus = exports should rise
Deindustrialisation = previously domestically made goods are imported

Question 4

UKs productivity

Answer 4

0.1%

Question 5

Cures of imbalance (not necessarily deficit) - expenditure switching (3)

Answer 5

Increase income tax
Increase interest rates
Relies on consumers being highly elastic

Question 6

Problem with expenditure switching policies - specific to UK 2)

Answer 6

Britain doesn’t produce certain things - pineapples or fuel
Importing = cost push inflation into uk economy due to inelastic demand

Question 7

Reduce imbalance (4+)

Answer 7

Reduce gov spending = reduce AD leading to less imports so firms would export
Taxes on trading partners = reduce exports
Supply side = increase productivity (training etc) = international competitive
Deregulation + privatisation = competitive = forced to lower average costs

Question 8

Label method in Britain used to improve imbalance (2)

Answer 8

British flag or red tractor on farm products
Consumers know they’re supporting domestic jobs + economy

Question 9

Problem with supply side policy

Answer 9

Time lag = not immediate

Question 10

Problem with privatisation / deregulation

Answer 10

Monopolies could firm = reduce efficiency

Question 11

Example of uk being reliant (3)

Answer 11

Imbalance suggests UK is reliant on the performance of other countries
If export markets like EU become weak = UK economic performance will be affected
Seen during the 2008 financial crisis

Question 12

Chinas situation (3+)

Answer 12

Since 2006 the US deficit with China narrowed + China’s surplus fell
A surplus indicates low consumer spending and a low savings ratio, which puts China at the risk of having unsustainable economic growth
However, the government now aims to grow the economy using domestic spending, rather than exports

Question 13

What did China do (4)

Answer 13

China made their exports more competitive by undervaluing their currency
Making their imports more expensive = inflationary pressure
A stronger Yuan causes lower growth = lower inflation = reduces the current account surplus
The US would prefer a stronger Yuan since it makes their domestic industries more competitive

Question 14

J curve diagram

Answer 14

Top of diagram = surplus
Bottom of diagram = deficit
Line = time

Question 15

Why will UK always be at point B j curve (2)

Answer 15

Import nation
High marginal prospensity to import and consumers are inelastic = BoP will get worse