The balance of payments

• What does the balance of payments record?

  All financial transactions between countries
• Why are exports considered positive in the balance of payments?

  They represent an inflow of money
• What are imports in the context of the balance of payments?

  Goods and services bought from foreign countries
• What does the current account include?

  Economic transactions between countries
• What are the main components of the balance of payments?

  • Current account
  • Capital account
  • Financial account
  • Balancing item
• What does a current account surplus indicate?

  Net inflow of money into the economy
• What is the UK's current account status?

  Net current account deficit
• What could happen if a current account deficit is large and prolonged?

  Financial difficulties in financing the deficit
• What are the causes of balance of payments disequilibrium?

  • Appreciation of the currency
  • Economic growth
  • Increased international competitiveness
  • Deindustrialisation
  • Membership of trade unions
  • Attractiveness to foreign investors
• How does currency appreciation affect the current account?

  It makes imports cheaper and exports expensive
• What is the impact of economic growth on imports?

  Increased demand for imports due to higher incomes
• What is deindustrialisation's effect on the UK's current account?

  It worsens the current account deficit
• How does foreign investment affect the capital account?

  It can create a capital account surplus
• What happens when there is a current account surplus?

  There is a capital and financial account deficit
• How does selling more exports affect the circular flow of income?

  It increases inflow of money into the economy
• What happens to the current account deficit during economic decline?

  It falls due to reduced consumer spending
• What is the effect of expensive imported raw materials on inflation?

  It can cause cost-push inflation
• How does currency appreciation affect imports and exports?

  Imports become cheaper, exports become expensive
• What is the relationship between productivity and international competitiveness?

  Higher productivity increases international competitiveness
• What is FDI?

  Flow of capital for lasting interest in foreign enterprise
• What are the benefits of FDI?

  Creates employment and promotes sustainable growth
• How do portfolio investments differ from FDI?

  Portfolio investments do not provide control over companies
• What policies can correct a balance of payments deficit or surplus?

  • Fiscal policy
  • Monetary policy
  • Supply-side policies
• How can fiscal policy address a current account deficit?

  By increasing income tax to reduce disposable income
• What is a potential downside of increasing income tax to reduce imports?

  It may impact domestic growth negatively
• What is the effect of government spending reduction on imports?

  It leads to less imports and increased exports
• Why might fiscal policy be ineffective in the long term?

  Consumers may revert to spending on imports
• What is a risk of imposing taxes on trading partners?

  It could lead to retaliation and reduced exports
• What is the challenge of implementing 'green taxes'?

  It may compromise competitiveness of domestic firms
• What do expenditure-reducing policies aim to achieve?

  Reduce demand in the economy to lower imports
• How can changing interest rates affect the current account?

  Lowering rates can depreciate currency, boosting exports
• What is the effect of high interest rates on imports?

  They can reduce demand for imports
• What is a potential issue with changing the exchange rate?

  It is hard to control the money supply effectively
• How can supply-side policies increase productivity?

  By increasing spending on education and training
• What is a potential downside of deregulation and privatisation?

  It could lead to monopolies forming
• What could happen if governments provide subsidies to industries?

  It may lead to retaliation from foreign countries
• How can expensive imported raw materials affect inflation?

  They can cause cost-push inflation in the economy
• How does international trade create interdependence among countries?

  Economic conditions in one country affect others
• What does a current account surplus or deficit indicate about an economy?

  It may indicate an unbalanced economy
• What is a potential issue with financing a current account deficit?

  It may become unsustainable in the long run