BOP

Question 1

What is a Balance of Payments?

Answer 1

financial recorded all transactions made between consumers and firms of government of one country and all other nations

Question 2

What is the current account?

Answer 2

• Is a record of all payments for trade in goods and services plus income flow.

Question 3

What is the financial account?

Answer 3

• Record of transfers for financial investment

Question 4

•Direct investment

Answer 4

This is net investment from abroad. For example, if a UK firm built a factory in Japan it would be a debit item on UK financial account

Question 5

Portfolio investment

Answer 5

These are financial flows, such as the purchase of bonds, gilts or saving in banks.

Question 6

porfoillio investment includes

Answer 6

They include •short-term monetary flows known as “hot money flows” to take advantage of exchange rate changes, e.g. foreign investor saving money in a UK bank to take advantage of better interest rates – will be a credit item on financial account.

Question 7

What is the Capital Account?

Answer 7

Is the transfer of funds associated with buying fixed assets such as land.

Question 8

Factors that affect the balance of payments.

Answer 8

• The high rate of consumer spending on imports (during an economic boom) – this will cause deficit.
• Decline in international competitiveness making countries exports less competitive and imports more attractive.
• Overvalued exchange rates which make exports relatively more expensive.
• Structure of economy – deindustrialisation can harm export sector.

Question 9

Does the Current Account Deficit increase or decrease after a period of economic growth?

Answer 9

• INCREASES

Question 10

Why does the Current Account deficit increase after economic growth?

Answer 10

• Because higher economic growth leads to higher consumer spending and therefore more spending on imports.

Question 11

Why during an economic downturn does the current accountdeficit decrease?

Answer 11

Because there is less money coming in so people spend less on imports.