Edexcel A Level Economics - Key Economic Concepts - Balance of Payments questions and answers

Balance of Payments (BoP) A record of all of the transactions between one economy (country) and all other economies (countries) over a given period of time. It is an account of all of the money flows into and out of an economy . The two halves of Balance of Payments 'Current Account' and 'Capital and Financial Accounts' Current account The part of the BoP where payments relating to 1) Trade in Goods 2) Trade in Services 3) Net Income, and... 4) Current Transfers are recorded. It is where flows of expenditures and incomes are recorded. Capital and Financial accounts The parts of the BoP where payments relating to savings, investment and currency (i.e. transactions concerning stocks of wealth) are recorded. Current account balance The sum of all of the inflows and outflows recorded on the Current Account. Note on current account balance Inflows of money from overseas consumers in return for G&S (i.e. foreign expenditures on Exports) and inflows of income earned by citizens overseas, or by investments owned by an economy's citizens, are entered as a positive entry in the Account. Outflows of money in return for foreign-made G&S (i.e. expenditures on Imports) and outflows of income earned by foreign citizens, or by foreign-owned investments, within the economy are entered as a negative entry. Current account deficit When the Current Account Balance is negative (i.e. more outflows than inflows). This is usually because a greater value of G&S is being imported than is being exported. Current account surplus When the Current Account Balance is positive (i.e. more inflows than outflows). This is usually because a greater value of G&S is being exported than is being imported. Exchange rate The value (price) of one country's currency in terms of another country's currency. When a currency strengthens/appreciates this means it can buy more of another currency. When a currency weakens/depreciates this means it can buy less of another currency. Floating exchange rate system A system whereby a currency's exchange rate is determined by the market forces of demand and supply in the international Foreign Exchange (ForEx) markets. This is the usual mechanism most countries use to establish their currency's exchange rate. Fixed exchange rate system A system whereby a currency's exchange rate is fixed at a certain value in terms of one, or several, other currencies. This is also known as 'pegging' the value of a currency. Managed exchange rate system A system whereby a currency's exchange rate is kept near to a certain value, or else allowed to fluctuate within a range of values in terms of one, or several, other currencies. Central bank A special unit of an economy's government which acts as bank for the rest of the banking system of the economy, which in turn deals with firms, and consumers, in the private sector. It usually controls monetary policy for that currency, including interest rates, money supply, and