Balance of Payments Current Account

Question 1

Balance of Payments

Answer 1

-Record of all international transactions between one country and the rest of the world

Question 2

Current Account

Answer 2

Measures the total value of export revenue and import expenditure of trade in goods & services , investment income and current transfers.

Question 3

Automatic Adjustment of BOP

Answer 3

C.A deficit (Value M>Value X
means increase in supply of pound(value of m increasing)–
devaluation
which means a depreciation of pound leading to WPIDEC making a C.A surplus)

Question 4

Causes of a current account deficit(low exports high imports)

Answer 4

Recession abroad—low incomes abroad—real disposable incomes fall demand for domestic exports—fall in revenue generated worse current account

-Strong exchange rate-makes exports dearer and imports cheaper

High Interest rates-Increase RFS (SPiCED)

IIncrease in inflation — (higher price of exports)

Question 5

consequences of a deficit

Answer 5

Less Demand-Pull inflation-eval (could lead to a deflationary spiral)

Unemployment increases(4.4%) -

-Fall in Growth eval(depends on spare capacity if lack of spare capacity minimal growth)(lower inflation -price of Uk X fals)- increase growth)

SPiCED leads to a fall in foreign debt)

Question 6

causes of a current account surplus

Answer 6

Low Inflation

Economic growth among trading partners

Depreciation of Exchange rate(fall in interest rates)(4.5%)

Increase income tax less income less mpi

Protectionism-imposing tarrifs

Question 7

Consequences of a Surplus

Answer 7

High Exports-increase demand for X-increase demand for currency which leads to an appreciation—less growth

Increase employment(4.4%

Question 8

policies to correct a current account deficit

Answer 8

Currency Devaluation
Deflationary Policies
Direct Controls
Supply side policies

Question 9

Policies to correct a deficit: Currency Devaluation

Answer 9

BOE could sell reserves of its own currency -increase supply of pound—fall in exchange rate

Fall in interest rates —less hot money flows

Question 10

Currency Devaluation Evaluation

Answer 10

if demand for imports is price inelastic-demand stays high increase value of M(inelastic as we must import )(manufacturing goods)
l But other countries are locked into trade aggreemnets demand falls value x falls which means deficit.(Thereby it depends on if Marshall Lemer condition is met only if PED m >1 would a devaluation improve)

Question 11

Deflationary Policies

Answer 11

Deflate the economy and reduce AD

-Fall in AD—less growth less incomes —improve C.A

-fall In AD low inflation increase value of X -increase AD

Question 12

evaluation for deflationary policies

Answer 12

Does a fall in Ad cause deflation on LRAS Curve,depends on spare capacity likely they have a lot

if other countries price levels are lower no demand for uk exports

Deflationary spiral fall in growth business confidence less I

Question 13

Direct controls-protectionism

Answer 13

Policies that seek to control cut or prevent expenditure on imports

Tarrifs-Increase price of M— Quantity demand for M falls _C.a Deficit imrpvoes

Question 14

Evaluation for direct controls-protectionism

Answer 14

Tarrifs-increase price of M increease cost push inflation fall in demand for uk X

Question 15

Supply side policies to improve deficit

Answer 15

SSP-Increase G spent on Edu -Increase output —Fall in price level —inccrease C.A

Privatisation —Firms profit driven increase I _-increase r and D increase Demand for X

Question 16

Evaluattion for supply side polices to improve deficit

Answer 16

depends on debt levels-Debt levels- to peak at £99,000 per household and approximately 2.8 trillion