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What is the balance of payments?
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What is the balance of payments?
The balance of payments is a record of all the financial transactions that occur between a country and the rest of the world.
Define the term current account.
The current account is all the transactions related to goods and services, along with payments related to the transfer of income.
What does a current account credit mean?
A current account credit means money is flowing into the country.
What does a current account debit mean?
A current account debit means money is flowing out of the country.
Define the term current account surplus.
A current account surplus occurs when the credits (money in) are higher than the debits (money out).
Define the term current account deficit.
A current account deficit occurs when the credits (money in) are less than the debits (money out).
What is the net trade in goods?
The net trade in goods is product exports minus product imports.
State the meaning of net trade in services.
The net trade in services is service exports minus service imports.
Define current transfers.
Current transfers are typically payments at the government level between countries, e.g. contributions to the World Bank.
State the formula used to calculate the current account balance.
Formula.
Current account balance = net trade in goods + net trade in services + net primary income + net secondary income.
True or False?
A current account deficit occurs when the value of imports is greater than the value of exports.
True.
A current account deficit occurs when the value of imports is greater than the value of exports.
True or False?
Currency appreciation makes a country's exports less expensive relative to other nations.
False.
Currency appreciation makes a country's exports more expensive relative to other nations.
True or False?
A relatively low rate of inflation is one cause of a current account deficit.
False.
A relatively high rate of inflation is a cause of a current account deficit.
How does product quality impact the current account?
Poor quality and design of products can cause a current account deficit as exports fall.
True or False?
A current account surplus occurs when the value of exports is greater than the value of imports.
True.
A current account surplus occurs when the value of exports is greater than the value of imports.
What is one cause of a current account surplus?
A relatively high productivity is a cause of a current account surplus. High productivity increases output and leads to more sales (exports).
What impact does currency depreciation have on the current account?
Currency depreciation makes a country's exports less expensive relative to other nations, leading to a current account surplus.
True or False?
A relatively high rate of inflation is a cause of current account surplus.
False.
A relatively low rate of inflation is a cause of a current account surplus. Relatively low inflation leads to relatively lower prices and increased exports.
State two consequences of a current account deficit?
Two consequences of a current account deficit include:
Increasing unemployment,
Slow economic growth or a recession
Lower standards of living
Increased borrowing
State two consequences of a current account surplus?
Two consequences of a current account surplus include:
Increasing employment
Economic growth
Higher standards of living
Demand pull inflation
True or False?
Doing nothing is a valid policy to address a current account deficit.
True.
Doing nothing to address the current account deficit means leaving it to market forces in the foreign exchange market to self-correct the deficit.
Define expenditure switching policies.
Expenditure switching policies aim to switch consumer expenditure from foreign markets (imports) to domestic markets. They include protectionist policies, which raise the price of imports, and currency devaluation, which makes the price of imports more expensive.
What is the aim of expenditure reducing policies?
The aim of expenditure reducing policies is to reduce the amount of money spent by households on imports. They include raising taxes, which cause consumers to have lower disposable income, and raising interest rates, which reduce the level of borrowing, resulting in a fall in the level of imports.
What is an advantage of expenditure switching policies?
An advantage of expenditure switching policies is that they are often successful in changing the buying habits of consumers, switching consumption from imports to domestically produced goods and services.
What is a disadvantage of expenditure switching policies?
A disadvantage of expenditure switching policies is that they often lead to retaliation by trading partners, which may offset any improvement to the deficit caused by the policy.
What is a disadvantage of expenditure reducing policies?
A disadvantage of expenditure reducing policies is that contractionary fiscal policy also dampens domestic demand. This can cause output to fall, slowing GDP growth and increasing unemployment.
What is an advantage of using supply-side policies to correct a current account deficit?
An advantage of using supply-side policies is that they improve the quality of products and lower the costs of production. Both of these help increase the level of exports, reducing the deficit.