Balance Of Payments

Question 1

What is BOP?

Answer 1

This is a financial record/statement that records all transactions between a country and the rest of the world

Question 2

What do the Debit and Credit sides of BOP contain?

Answer 2

Debit- Outflow of money from a country
Credit- Inflow of money into a country

Question 3

Components of BOP and what they contain.

Answer 3

Current Account- Includes Exports and imports of goods and services.

Capital Account- Records net investment into an economy.

Financial Account- Measures the changes in the number of foreign assets held by residents of a country.

Question 4

Problems of Deficit in BOP?

Answer 4

1. Increase goverment borrowing in order to cover up=increased debts=reduced confidence.

2.Increased dependency on foreign goods=vulnerable=less competitive.

Question 5

Policies to counter deficit?

Answer 5

Expenditure reducing policies (Contractioary Monetary & Fiscal policies).
Expenditure switching policies (Protectionist policies).

Question 6

Problems of a surplus in BOP?

Answer 6

Inflationary due to rise in AD

Less goods available for domestic individuals.

Question 7

How to counter surplus?

Answer 7

Expansionary Monetary and Fiscal policies.