Balance of payments (Macro)

Question 1

What is the balance of payments?

Answer 1

A record of all the financial transitions taking place between the UK and other countries.

Question 2

Aspects of the balance of payments?

Answer 2

Financial account
Capital account
Current account

Question 3

What is the financial account?

Answer 3

Measures flows of financial capital into and out of the country:

Question 4

What are aspects of financial account?

Answer 4

-FDI
-Portfolio investment (financial assets outside the UK)
-Short term speculative capital

Question 5

What Is the current account?

Answer 5

Largest part of BOP, Trade in goods, services, primary income and secondary income.

Question 6

Does the UK run a good deficit or surplus?

Answer 6

Deficit (Imports more than it exports)

Question 7

Does the UK run a services deficit or surplus?

Answer 7

Surplus (Banking services exports)

Question 8

What is primary income?

Answer 8

Flows of income from investments abroad (Dividends or interest). Currently a deficit in the UK do to investment from India and China.

Question 9

What is secondary income?

Answer 9

Transferred of money from grants, gifts, remittences.

Question 10

What factors influence exports?

Answer 10

-Foreign GDP (Increased growth increases demand for UK exports)
-Productivity, high productivity will lower costs and this translates to prices for exports.
-Inflation, inflation increases costs for exports, less competitive therefore.

Question 11

What are the two types of policy to correct a current account deficit?

Answer 11

-Expenditure reducing policies (deflationary)
-Expenditure switching policies (protectionism)

Question 12

What is an expenditure reducing policy?

Answer 12

Reducing imports through higher taxation, lower government expenditure or higher interest.

Question 13

What is the problem with such policies?

Answer 13

-Deflationary policies limit growth and increase unemployment.
-Higher interest will increase exchange rates, so lower export competitiveness.

Question 14

What is an expenditure switching policy?

Answer 14

Encouraging reduction in imports AND encouraging domestic exports.
Through devaluation as this increases exports.

Question 15

Issues with expenditure switching policies?

Answer 15

Depends on price elasticities of both imports and exports.

Question 16

What is the Marshall-Lerner condition?

Answer 16

Idea that devaluation only works if elasticity is greater than one for imports and exports.

Question 17

What is the J curve?

Answer 17

Idea that devaluation will first worsen then improve current account deficit, as in time, substitutes become available, hence elasticity increases.

Question 18

What else can be used as expenditure switching policies?

Answer 18

Protectionism, increases relative costs of foreign goods to domestic.

Question 19

Issues with such protectionism?

Answer 19

Retaliation, would need to be on all other nations.

Question 20

One last policy to improve current account deficit?

Answer 20

Supply side policies.

Question 21

Issues with a current account deficit?

Answer 21

-Net outflow of money
-Weakness in exports
-Fixed exchange rates
-May not be met with surplus in financial or capital.

Question 22

Why does a current account deficit not matter?

Answer 22

-Imports rise with economic growth
-If its met with surplus in capital or financial accounts
-Short lived
-If the government has plenty foreign currency reserves then lenders can supply capital if needed.