Exam code: 0455 & 0987
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Define Balance of Payments (BoP).
The Balance of Payments (BoP) is a record of all the financial transactions that occur between a country and the rest of the world.
What are the two main sections of the Balance of Payments?
The two main sections of the Balance of Payments are the Current Account and the Financial and Capital Account.
Define current account surplus.
A current account surplus occurs when the credits (money in) are higher than the debits (money out).
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Define Balance of Payments (BoP).
The Balance of Payments (BoP) is a record of all the financial transactions that occur between a country and the rest of the world.
What are the two main sections of the Balance of Payments?
The two main sections of the Balance of Payments are the Current Account and the Financial and Capital Account.
Define current account surplus.
A current account surplus occurs when the credits (money in) are higher than the debits (money out).
Define current account deficit.
A current account deficit occurs when the credits (money in) are less than the debits (money out).
What are the four main components of the current account?
The four main components of the current account are trade in goods, trade in services, primary income and secondary income.
Trade in services is often called trade because it does not involve physical products.
Trade in services is often called invisible trade because it does not involve physical products.
Primary income refers to income earned from and abroad.
Primary income refers to income earned from investments and employment abroad.
Define secondary income (current transfers).
Secondary income (current transfers) are transfers of money where nothing is received in return, such as foreign aid, remittances, and payments to international organisations.
A current account occurs when credits (money in) are lower than debits (money out).
A current account deficit occurs when credits (money in) are lower than debits (money out).
True or False?
Exports of goods and services are recorded as credits (+) on the current account.
True.
Exports of goods and services bring money into the country, so they are recorded as credits (+) on the current account.
What is the formula for calculating the current account balance?
The formula for calculating the current account balance is: net trade in goods + net trade in services + net primary income + net secondary income.
Define current account deficit.
A current account deficit occurs when the value of imports exceeds the value of exports, meaning the country spends more on foreign goods, services, and income transfers than it earns.
What is one effect of a relatively low productivity on a country's current account?
Relatively low productivity makes a country's exports more expensive and less competitive, which can worsen the current account deficit as export sales fall and imports rise.
How can a strong currency contribute to a current account deficit?
A strong currency makes exports more expensive for foreign buyers and imports cheaper for domestic consumers, leading to falling export sales and rising imports, which can increase the current account deficit.
A period of rapid economic growth may lead to a current account because rising incomes increase demand for .
A period of rapid economic growth may lead to a current account deficit because rising incomes increase demand for imports.
Define current account surplus.
A current account surplus occurs when the value of exports exceeds the value of imports, indicating the country is a net earner from trade and income flows.
Currency makes a country's exports cheaper and imports more expensive, improving the current account balance.
Currency depreciation makes a country's exports cheaper and imports more expensive, improving the current account balance.
How does a relatively low rate of inflation affect a country's exports?
A relatively low rate of inflation makes a country's exports less expensive than those of other nations, which increases demand from foreign buyers and improves the current account balance.
Define demand-pull inflation.
Demand-pull inflation is when increased demand in the economy causes prices to rise.
True or False?
A current account deficit can lead to depreciating currency and higher import prices.
True.
A weaker current account can lead to currency depreciation, making imports more expensive and increasing the risk of cost-push inflation.
A sustained fall in exports can slow down economic or push the economy into .
A sustained fall in exports can slow down economic growth or push the economy into recession.
What are two positive consequences of a current account surplus?
A current account surplus can lead to rising employment and economic growth, as higher demand for exports increases production and boosts GDP.
What policy actions did President Trump take to try to reduce the US current account deficit?
President Trump introduced tariffs on Chinese imports, withdrew from trade agreements, cut taxes, and encouraged reshoring of manufacturing to reduce the US current account deficit.
Define current account deficit.
A current account deficit occurs when the value of imports of goods, services, income, and transfers exceeds the value of exports, leading to a net outflow of money from the country.
What is the main advantage of leaving a current account deficit to market forces?
The main advantage is that floating exchange rates act as a self-correcting mechanism, which can improve the deficit over time without direct government intervention.
True or False?
Currency depreciation always corrects a current account deficit quickly.
False.
It may take a long time for self-correction to occur, and external factors can delay or prevent currency depreciation.
A higher level of imports will eventually cause the currency to , making imports more expensive and exports cheaper.
A higher level of imports will eventually cause the currency to depreciate, making imports more expensive and exports cheaper.
Define expenditure-switching policies.
Expenditure-switching policies are measures that aim to shift consumer spending from imports to domestically produced goods and services, such as protectionist policies and currency depreciation.
What is one disadvantage of using protectionist policies to improve the current account balance?
A key disadvantage is that trading partners may retaliate with tariffs or quotas, which can reduce exports and offset improvements to the deficit.
Protectionist policies raise the price of , encouraging consumers to buy domestic products instead.
Protectionist policies raise the price of imports, encouraging consumers to buy domestic products instead.
What is the difference between expenditure-switching and expenditure-reducing policies in addressing a current account deficit?
Expenditure-switching policies aim to redirect spending from imports to domestic goods, while expenditure-reducing policies aim to lower overall demand for imports by reducing total (aggregate) demand.
Define expenditure-reducing policies.
Expenditure-reducing policies are measures such as higher taxes or interest rates that aim to reduce total (aggregate) demand in the economy, lowering the demand for imports.
Raising taxes reduces consumers' , leading to less spending on imports.
Raising taxes reduces consumers' disposable income, leading to less spending on imports.
True or False?
Supply-side policies can improve the current account by making exports more attractive.
True.
Supply-side policies like investment in education or infrastructure improve productivity and lower costs, making exports more competitive internationally.
Investing in raises productivity and can make exports more attractive.
Investing in education raises productivity and can make exports more attractive.