current account of the balance of payments chapter 27

Question 1

dividend payments

Answer 1

a share of a firms profits paid to its shareholders

Question 2

exchange rate

Answer 2

price of one currency in terms of another currency

Question 3

balance of payments account

Answer 3

a record of a country’s economic transactions with the rest of the world over a year

Question 4

capital account

Answer 4

within the balance of payments ,a record of the sale and purchase of copyrights, patents, trademarks, and money brought into the country by immigrants and taken out by emigrants

Question 5

financial account

Answer 5

within the balance of payments, a record of the transfer of financial and capital assets between the country and the rest of the world

Question 6

components of the current account of the balance of payments

Answer 6

trade in goods
trade in services
primary income
secondary income

Question 7

components of the current account of the balance of payments: trade in goods

Answer 7

refers to the export and import of goods. exports give rise to credit items while imports give rise to debit items the trade in goods balance is the revenue earned from exports of goods minus expenditure on imports of goods. the trade in goods balance can also be called the visible balance and the merchandise balance. a trade in goods surplus arises when export revenue is greater than import expenditure

Question 8

components of the current account of the balance of payments: trade in services

Answer 8

refers to the trade in exports and imports of services, which may be referred to as ‘invisibles’. A trade in services deficit occurs when revenue from the export of services is less than the expenditure on services bought from other countries

Question 9

components of the current account of the balance of payments: primary income

Answer 9

includes income in the form of profits, interest and dividends earned on direct investment abroad and foreign earnings on investments in the country

Question 10

components of the current account of the balance of payments: secondary income

Answer 10

includes payments made and receipts received for which there is no corresponding exchange of an actual good or service. they include government transfers such as payments to and receipts from international organisations and foreign aid. transfers by private individuals are also included in this part of the current account. one such transfer is workers’ remittances

Question 11

workers’ remittances

Answer 11

this the transfer of money from people working in a foreign country

Question 12

what does money coming into the country create

Answer 12

it creates credit items and is recorded with a positive sign

Question 13

what does money going out of the country create

Answer 13

it gives rise to debit items and is recorded with a negative sign

Question 14

what does the balance of payments account consist of

Answer 14

it consists of the current account, capital account and the financial account

Question 15

current account balance

Answer 15

the current account balance is the overall balance of the trade in goods, trade in services, primary income and secondary income

Question 16

what does a current account deficit mean

Answer 16

it means that the combined debit items on the four parts of the current account balance are greater than the combined credit items on the four parts

Question 17

what does a current account surplus mean

Answer 17

it occurs when the credit items on the four parts are greater than the combined debit items

Question 18

imbalance (in the current account of the balance of payments)

Answer 18

debit items in the current account not equaling credit items. there is usually an imbalance in the current accounts of individual countries

Question 19

current account deficit (of the balance of payments)

Answer 19

the value of debit items on the current account exceeding the value of credit items.

Question 20

current account surplus (of the balance of payments)

Answer 20

the value of credit items on the current account exceeding the value of debit items.

Question 21

balance (in the current account of the balance of payments)

Answer 21

debit items on the current account equalling credit items.

Question 22

balance (in the current account of the balance of payments)

Answer 22

debit items on the current account equaling credit items. the value of current account deficits are matched by current account surpluses

Question 23

how is the balance of trade of goods calculated

Answer 23

calculated by subtracting the value of imports of imports of goods from the value of exports of goods

Question 24

how is balance of trade in services calculated

Answer 24

deducts the value of imports from the value of exports

Question 25

how is the balance of trade in goods and services (aka total trade balance)

Answer 25

calculated by adding the balance of trade in goods to the balance in services

Question 26

how is the current account balance calculated

Answer 26

the balance of the primary account and the balance of the secondary income are added to the balance of trade in goods and services

Question 27

how does a declining domestic economy cause a current account surplus

Answer 27

If an economy is experiencing a recession, demand for imports is likely to decline. Consumers will buy fewer goods and services and firms will buy fewer raw materials and capital goods as output will fall. Such a cause of a current account surplus will not be beneficial.

Question 28

how can increasing economic activity in the country’s trading partners

Answer 28

If the countries’ trading partners are doing well, they are likely to buy more of the country’s exports. The country’s people who are working in these countries may earn higher wages, some of which they can send back to their relatives at home.

Question 29

how can structural advantages cause a current account surplus

Answer 29

A country’s firms may be competitive for a number of reasons. These include good education and training and a high level of investment and innovation. Other reasons why a country may be successful in selling more goods and services to other countries than it buys from them include low inflation and a low exchange rate, These two factors may result in the country’s products being price competitive.

Question 30

what is known as country living beyond its means

Answer 30

A current account deficit allows the residents of a country to consume more products than the country produces.

Question 31

how can should a country finance a deficit

Answer 31

it can by attracting investment into the country or by borrowing. this will involve an outflow of money in the future in the form of investment income

Question 32

impact of an increase in current account deficit

Answer 32

it may also reduce aggregate demand, which may slow down economic growth and may cause unemployment

Question 33

what is having a current account surplus mean

Answer 33

because it involves a country earning more than it is spending. it also means that the country’s residents are not enjoying as high a standard of living as possible.

Question 34

what can generate inflationary pressure

Answer 34

high level of demand, combined with additions to the money supply

Question 35

why would a country change its policies

Answer 35

those countries experiencing current account deficits may also put pressure on the country to change its policies in order to reduce its surplus

Question 36

how can the significance of the size of a current account deficit or surplus be assessed more efficiently

Answer 36

by considering it as a percentage of the country’s gross domestic product (output) rather than seeing it in monetary terms

Question 37

how can a current account deficit be caused by a growing domestic economy

Answer 37

when firms are increasing their output, they may buy more raw materials and capital goods from abroad. as well as import expenditure increasing, export revenue may decline as a result of exports being diverted from the foreign to the domestic market.

Question 38

why is a current account deficit caused by a growing domestic economy not likely to be a problem

Answer 38

it is likely to be a short term and to be self correcting. as the country’s firms use the imported raw materials and capital goods to produce more products, they are likely to sell more products both abroad and home. so, export revenue may rise to match the higher import expenditure

Question 39

how can a declining economic activity in a country’s trading partners cause a current account deficit

Answer 39

if the countries that buy this country’s imports experience recessions or slowdowns in economic growth, their import expenditure may fall or rise more slowly. A current account deficit that arises from either change in the economic cycle of the domestic economy or the economies of trading partners is sometimes referred to as a cyclical deficit.

Question 40

why is a current account deficit caused by a declining economic activity in a country’s trading partners not likely to be a problem

Answer 40

it is likely to be relatively short term and self correcting

Question 41

how can a current account deficit be caused by structural problems

Answer 41

low labour and capital productivity result in a lack of international competitiveness. These, in turn, may result from poor quality education and training and a low level of investment and innovation.

Question 42

why is a current account deficit that lasts in the long run a problem

Answer 42

This is because it indicates that domestic firms are not internationally competitive and that the country may have to borrow to finance the surplus spending.

Question 43

reasons for lack of of international competitiveness

Answer 43

an overvalued exchange rate maintained by government intervention and a relatively high inflation rate. Low labour and capital productivity also result in a lack of international competitiveness

Question 44

why can current account deficit caused by structural problems a concern

Answer 44

it is a not self correcting