Macro: Current Account

Question 1

What is the balance of payments?

Answer 1

A record of the financial transactions between one country and the rest of the world over a period of one year.

It includes inflows and outflows of foreign currency.

Question 2

What are the three sections of the balance of payments?

Answer 2

• The current account
• The capital account
• The financial account

Each section serves a different purpose in recording financial transactions.

Question 3

What does the current account record?

Answer 3

A country’s trade in exports, imports, and income with the rest of the world.

It provides insights into a country’s economic transactions with other nations.

Question 4

What are the four sub-sections of the current account?

Answer 4

• Trade in goods
• Trade in services
• Primary income
• Secondary income

Each sub-section captures different types of economic interactions.

Question 5

Define ‘Balance of Trade’.

Answer 5

The difference between the value of exports and the value of imports.

A positive balance indicates more exports than imports.

Question 6

What constitutes primary income in the current account?

Answer 6

UK earnings on overseas assets minus payments to foreign owners of UK assets.

This includes interest, profits, and dividends.

Question 7

What is secondary income in the context of the current account?

Answer 7

Money transfers between governments, including contributions and aid transfers.

Examples include the UK’s contribution to the EU and disaster relief.

Question 8

How is the current account balance calculated?

Answer 8

Trade in goods + Trade in services + Primary income + Secondary income (transfers).

This formula summarizes the net transactions recorded in the current account.

Question 9

What is a current account deficit?

Answer 9

A net outflow of money from the current account, where outflows exceed inflows.

This leads to a decrease in aggregate demand.

Question 10

What is a current account surplus?

Answer 10

A net inflow of money into the current account, where inflows exceed outflows.

This results in an increase in aggregate demand.

Question 11

What is globalization in the context of economies?

Answer 11

The interconnectedness of economies, increasing over the past 25-30 years.

It influences domestic economies through international trade and other factors.

Question 12

What are some drivers of economic interconnectedness?

Answer 12

• Increased levels of international trade
• Greater ownership of overseas assets
• Technological change
• Increased levels of migration

These factors contribute to the complexity of global economic interactions.

Question 13

Fill in the blank: A current account deficit causes an overall net _______ of income from the circular flow.

Answer 13

withdrawal

Question 14

True or False: A current account surplus indicates that a country is spending more on imports than it earns from exports.

Answer 14

False

A surplus means that inflows are greater than outflows.