balance of payments

Question 1

what does the balance of payments record

Answer 1

all of the finanacial transactions made between consumers, businesses and the government in one country with another country

inflows or foreign currency are positive entry

outflows of foreign currency are a negative entry (imported goods and services)

Question 2

why might a current account defecit or surplus occur

Answer 2

productivity
factor costs of production
exchange rates
industrial structure
commodity prices
protectionist policies
sources of comparitive advantage

Question 3

what are the consequences of a current account defecit

Answer 3

AD will reduce, as there are fewer exports and more imports, this will reduce inflationary pressures, increase unemployment and reduce economic growth

depreciation of the currency as more imports increase demand for other currencies, and less exports reduce demand for the domestic currency

capital will flow out of the economy to allow more imports to come in

Question 4

consequences of a current account surplus

Answer 4

increase in AD due to more exports and fewer imports will increase economic growth, reduce unemployment and increase inflationary pressures

for a country to experience a current account surplus, its trading partner must be experiencing a current account deficit

trading partner may therefore want to stop trading

therefore, the country will lose out on export oppertunities, which may reduce economic growth and increase unemployment

Question 5

solutions to current account defecits

Answer 5

exchange rate policies - the currency could be devalued by lowering intrest rates or increasing supply on the foreign exhange market. This will make exports cheaper and imports more expensive, improving the current account

deflationary policies - causing deflation should decrease export prices and stop consumers from buying luxury imported goods, improving the current account

supply side reforms - these should increase productivity, reducing the price of exports, improving the current account

protectionism - tarrifs and quotas will increase the price of imports, improving the current account