Balance of Payments

With the help of a diagram, explain two ways in which a fall in the balance of trade in goods may affect the value of a floating exchange rate and consider the extent to which a change in the relative rate of interest between two countries may have a greater impact on the exchange rate.

Assess whether an improvement in the terms of trade or a surplus on the current account of the balance of payments is of more benefit to an economy.

Explain three components of the current account of the balance of payments and consider the extent to which a depreciation in the exchange rate will always lead to a surplus on the current account.

Assess the extent to which the use of supply-side policy would be the best way to reduce a deficit on the current account of the balance of payments.

Explain two reasons why an economy may have a deficit on the current account of its balance of payments and consider whether its government is likely to be concerned about this deficit.

Assess whether it is better to use protectionist policies or contractionary policies to reduce a deficit on the current account of the balance of payments.

Explain the difference between the terms of trade and the balance of trade in goods and consider whether an economy should be more concerned about its terms of trade than its balance of trade in goods.

Assess whether a rise or a fall in the terms of trade will benefit the macroeconomic performance of an open economy that is heavily dependent on international trade.

Explain how import tariffs might correct an imbalance in the current account of the balance of payments and consider whether these tariffs are the best way of correcting such an imbalance.

A country has a persistent deficit on the current account of its balance of payments.

Assess the likely consequences for the domestic and external economy of this country.

An economy moves from a deficit to a surplus on the current account of the balance of payments.

Explain what is meant by a surplus on the current account of the balance of payments and consider the possible impact on the level of employment and prices when there is a change from a deficit to a surplus current account balance in an economy.

Discuss whether expenditure-reducing or expenditure-switching policies are more likely to be of greater overall benefit if adopted to remove a persistent deficit on the current account of the balance of payments.

Explain why some countries consistently have a deficit on the current account of the balance of payments.

Discuss the extent to which expenditure-switching policies and expenditure-reducing policies might be able to reduce such a deficit.

With the aid of a diagram, explain how a central bank intervenes to maintain a fixed exchange rate when the economy is experiencing a current account deficit on its balance of payments.

Discuss whether expenditure-reducing policies are likely to reduce the current account deficit on the balance of payments for an economy with a floating exchange rate.

Explain the likely causes of a deficit on the current account of the balance of payments for an economy that relies heavily on agricultural products.

The largest economy in the world, the United States (US), records a persistent deficit on its current account of the balance of payments.

Discuss what is likely to be the most effective way to reduce this deficit.

Explain how a high rate of inflation and a rise in an economy’s exchange rate can each cause a deficit in an economy’s current account of the balance of payments.

Discuss whether a high rate of inflation or a deficit on the current account of the balance of payments is the more serious problem for an economy.