Balance of Payments

Question 1

What is the balance of payments

Answer 1

A record of payments between one country and the world

Question 2

What are the two sections of the balance of payments

Answer 2

Current account
Capital & Financial account

Question 3

What does the trade of services mean in the context of a current account

Answer 3

Import and exports of services

Question 4

What are the four parts of the current account

Answer 4

Trade in goods
Trade in services
Investment income
Current transfers

Question 5

What does the trade of goods mean in the context of a current account

Answer 5

Imports and exports of goods

Question 6

What is the purpose of the current account

Answer 6

It measures the inflows and outflows of money by measuring the trade in goods, trade in services, current transfers and investment income

Question 7

What does investment income mean in the context of a current account

Answer 7

When someone invests in a foreign country their returns on their investment will have a positive transaction of the current account of their home country

Question 8

What does the current transfers mean in the context of a current account

Answer 8

When people send money into a country without anything in return (remittances etc.)

Question 9

What is the only type of current transfer

Answer 9

Remittance - money transferred back home from relatives working abroad

Question 10

What is it called when the inflows into an economy is greater than the outflows out of an economy

Answer 10

A current account surplus

Question 11

What is a current account equilibrium

Answer 11

It’s when the inflows into an economy is the same value as the outflows of an economy

Question 12

What is a current account deficit

Answer 12

When the outflows of an economy are greater than the inflows

Question 13

What is the Capital & Financial account

Answer 13

It tracks investments into and out of a country

Question 14

What is the problem with the
Capital & Financial account

Answer 14

When investment from overseas comes to the UK the returns will go back to the country of origin
This harms the economy of the country receiving investment in the long run

Question 15

What is an example of the problem with the Capital & Financial account

Answer 15

Zambia
Had current account deficit but capital and financial account surplus because of investments from China
But China then owned thousands of Zambian assets so the rent and profit of these assets go to China
This deprives Zambians of potential earnings

Question 16

What is the macroeconomic objective when it comes to the balance of payments

Answer 16

To have a current account equilibrium and a Capital & Financial account at zero

Question 17

Based on this information what is the Capital & Financial account of Germany

Answer 17

They had a Capital & Financial account deficit of 245 billion euros

Question 18

What are the five factors affecting the current account

Answer 18

Exchange rates
State of the world economy; relative inflation, relative costs
Quality
Income
Degree of protectionism

Question 19

Explain how exchange rates are a factor in influencing the current account

Answer 19

If the pound appreciates then then the imports will get cheaper and exports will get more expensive
This will lead to an increase in consumers buying imports and a decrease of people buying exports in foreign countries
This will decrease the current account
If the pound depreciates the opposite happens

Question 20

Explain how relative inflation effects the current account

Answer 20

If there are two countries and one country has a higher inflation rate then foreign consumers will choose to buy exports from the other country because the price level is increasing less than the other country
This means the country with the higher inflation will experience a decrease in the current account

Question 21

Explain how relative costs has an effect on the current account

Answer 21

If the costs of production are higher in one country than another then the prices will be higher in that country
The foreign consumer will choose the country with the lower prices so that the country with the higher costs will experience a decrease in export revenue
This will decrease the current account of that country

Question 22

Explain how quality has an effect on the current account

Answer 22

If the quality of the same product in two countries are different foreign consumers will choose the country with the higher quality
This will increase exports of that country that increase the current account

Question 23

Explain how income has an effect on the current account

Answer 23

If national income increases consumers import more normal goods and the current account decreases

Question 24

Explain how protectionism affects the current account

Answer 24

Increased tariffs will cause consumers to switch from expensive foreign goods to domestic goods
This will decrease import expenditure and increase the current account