The Balance of Payments

Question	Answer
Define the Balance of Payments	Measures the economic transactions between UK residents and the rest of the world.
The Balance of payments measures what 5 main things ?	- Trade in goods - Trade in services - Income flows from investments - Financial flows - shares, loans - Foreign aid.
The Balance of Payments is split into what 3 accounts ?	1. The current account 2. Capital account 3. Financial account
The current account measures what 4 main things ?	- Trade in goods - Trade in services - Income flows - Current transfers
The capital account measures what ?	The sale and purchase of capital assets and non-produced or non-financial assets
The financial account measures trade in ...	Financial assets
What are imports ?	The purchase of goods and services by UK residents from abroad.
Imports represent a ... on the balance of payments account	Debit
Why might imports be purchased ?	1. Better quality than those existing in the UK 2. They are not capable of being produced in the UK 3. The cost of production is lower than similar items produced in the UK 4. The service associated with such items may be better abroad than from UK producers.
What are exports ?	The sale of goods and services by UK residents to foreign buyers
Exports represent a ..... on the balance of payments accounts	credit
The level of exports may be dependent on the ...... of UK producers in comparison to those abroad	competitiveness
Trade not only occurs in goods and services but ...... and ...... are also recorded as a result of .........	credit and debits Financial transactions
Give 4 examples of financial transactions as trade	1. Buying and selling of shares 2. Buying and selling of currencies 3. Buying and selling of bonds, financial derivatives, forward contracts etc 4. Movements of funds by governments and financial institutions e.g. Gold, SDRs etc
Services are sometimes referred to as ...	Invisible trade
The purchase and sale of services is an ......... component of UK trade	increasingly important
What are the main 10 categories of trade in services ?	1. Transportation 2. Travel 3. Communications 4. Construction 5. Insurance 6. Financial 7. Computer and information 8. Royalties and licence fees 9. Personal, cultural and recreational 10. Government
What are reserve assets ?	Assets held by UK government and may be used in part to help correct balance of payments positions: - Gold -SDRs - Foreign exchange
The UK trading position is heavily reliant on the changing nature of ..... across the globe	competitiveness
The changing nature of competitiveness across the globe has an impact on UK trade in terms of what 3 things ?	1. What we trade 2. How much we trade 3. Who we trade with
What are the main factors influencing international competitiveness ? 3 marks	1. Level of domestic inflation in relation to our trading partners 2. Level of UK productivity in relation to trading partners 3. Level of investment in physical and human resources influences competitiveness
All the factors influencing international competitiveness affect the .... .... of production	unit cost of production
Define capital flows	Consists of outward investment (Capital outflow) and foreign direct investment (capital inflow)
With exports, overseas residents .... ..... in order to finance the purchase of UK exports	Buy pounds
With exports - Currency flows .... the UK in payment for goods and services flowing ...	Into the UK Flowing out
Imports: Residents ... pounds and ... foreign currencies to finance the purchase of goods and services produced by other countries	Sell pounds Buy Foreign currencies
The balance of trade in goods shows the extent to which the value of ..... of goods exceeds the value of ...... and visa versa.	Exports Imports
A + shows a ..... item flowing .... UK	credit item flowing into UK
A - shows a .... item flowing ..... UK	Debit item flowing out UK
The UK has a significant balance of payments deficit in ...... goods, reflecting a loss of .......	manufactured goods Competitiveness
Define investment income	Profit and interest income flowing into a country from assets that residents of the country own abroad
UK residents depositing money in offshore bank accounts is an example of what ?	Capital outflows
Interest payments from money deposited in offshore bank accounts is an example of what ?	Investment income inflow
Define net investment income	The difference between inward and outward profit flows.
Transfers: Give 3 examples of outward flows	1. British Aid 2. EU budget 3. Income sent overseas by migrant workers to their families
The decline of manufacturing and the growth of service industries mean that the UK now has a ........ and ........ economy	Post-industrial Service sector economy
What is one of the largest export industries in the UK ?	Financial services industry
What highlighted the need for a more resilient and sustainable financial services industry to support the economy ?	Financial crisis of 2007
The financial services sector provides essential .... and financial services to businesses and households	credit
During the period after 2000, the expansion of the financial services was a significant influence on the ...... of the economy overall	real growth rate
Recent growth of the financial services sector was reversed in the recession, reducing GDP permanently by about ....	1.9%
Due the recession, the country has suffered a further loss of income as a result of the losses banks have made, with a total fall in real national income of .... and government revenue reduced by ..... of GDP	2.4% 1%
Services such as retailing, education and provision of healthcare are produced and consumed in the ......	non-internationally traded economy 'sheltered economy'
Many services previously produced within the UK are now being ...... which is an important part of the ...... process	Imported Globalisation
Many UK companies which used to produce services 'in-house' now ........ or buy the services from outside suppliers, located in countries with ........	outsource source of cheap labour
UK-based companies are locating 'back office' , what does this mean ?	Locating services overseas
The UK is still a significant net exporter of what 3 things ? This illustrates the UK's ........ in service sector industries	Financial Insurance ICT services
What is equilibrium of the balance of payments ?	When the current account balances over a period of years and is compatible with occurrence of short-term current account deficits and surpluses
What is BOP disequilibrium ?	Persistent tendency for payments for imports to be significantly greater or less than payments for exports over a period of years.
Why do the estimates of the items in the BOP never sum to 0 ?	Trade flows and most items in the BOP are inaccurately measured and recorded
Outline the main problems of a current account deficit (3 marks)	1. Persistent long-run imbalance indicates a fundamental disequilibrium 2. Long-run, decline of a countries industries in the face of international competition lowers living standards 3. A deficit in a poor country can become the means of financing the 'champagne lifestyles' of ruling elite.
What are the main positives of a current account deficit ?	1. Short-run, does not pose a problem 2. Short-run, deficit allows country's residents to enjoy better living standards boosted by imports higher than what would be possible from consumption of country's output alone. 3. In a poor country, importing capital goods on a large scale helps modernize infrastructure and promotes economic growth
Main problems with a current account surplus ?	1. Once country's surplus is another country's deficit 2. Surplus can be inflationary ( if the economy is close to full capacity, demand-pull inflation occurs )
Export-led growth is crucial for ...... from recession to lead into ...... growth	Recovery Long-term growth
What is the effect of new middle classes in emerging countries on exports/imports	Have spending power and demand high-end products we produce Leads to higher exports
According to CBI, industries with high export growth potential could significantly increase our ....	GDP
UK goods becoming quality competitive may only be achieved in the ..... term, helped by appropriate ...... policies implemented by the ...... and supply-side reforms in the ....... sector	Long-term Supply-side policies Government Private sector
An increase in exports is a net ...... of ..... the circular flow of income	Injection of spending into
An increase in exports shifts the AD curve	Outward
An increase in exports, ceteris paribus, causes RNO to ....., causing a fall in ....... when the economy is in a recession	increase demand-deficient unemployment
On a Keynes AD/AS diagram, further shifts in AD outwards due to an increase in exports eventually becomes ....	Inflationary
When the economy is producing on the verticle LRAS curve, any further increase in demand for exports will lead to the price level ...... without any substantial increase in ....	to rise Real national output
HOWEVER, foreign demand for a country's exports may be in response to favorable ...... conditions in the ....... currency which shifts the ....... outwards	supply-side domestic LRAS curve
What is export led growth ?	When the economy can produce and supply the goods needed to meet the increase in export demand without generating inflation
A fall in export demand or an increase in domestic demand for imports is a net ...... of demand from the circular flow of income, AD shifts ..... occurs and real national output	leakage Inwards Deflation occurs and RNO falls.
What 3 policies can be used to reduce a BOP current account deficit ?	1. Supply-side policies 2. Demand side policies
Explain how spending on education and training can reduce the deficit What is the main aim ?	Improves the quality of the exports and therefore their competitiveness. Aim is to boost export sales rather than reduce spending on imports.
Demand-side policies: What are expenditure switching policies and how are these used to reduce the deficit ?	Attempts to make imports relatively expensive compared to exports 1) Import controls such as tariffs 2) Bringing about reduction in exchange rate such as a devaluation.
What are expenditure reducing policies and how are they used to reduce the deficit ?	- Government attempts to reduce spending throughout the economy - Deflate the economy - Reduce the amount spent on imports by increasing taxation rates, cut its own spending (fiscal) or increase interest rates (monetary)
UK's current account deficit in 2013 ?	£72.4 billion 4.2% of GDP
Financial account net inflow in 2013 compared with 2012	Recorded a net inflow of £62.6 billion compared with a net inflow of £49.1 billion in 2012.
Q1 2008 Current account deficit Q3 2014 current account deficit	-0.4 billion -27 billion

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