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Balance of payments

Question 1

Which account would the following transactions be entered in?

  1. The sale of £2b worth of UK motor vehicles to Australia.

  2. Australian tourists spending £200m in the UK.

  3. The import of £1b computer products from the USA.

  4. The import of £250m worth of coffee beans from Brazil.

  5. The purchase of shares by a UK citizen, worth £10m, in a Brazilian firm.

  6. The payment of dividends to a German citizen who owns shares in a UK firm.

Question 2

  1. What is meant by saying that the balance of payments always equals zero?

  2. Distinguish between a trade deficit and a current account deficit.

  3. Under what circumstances might a current account deficit be seen as a problem?

  4. Identify and explain three causes of a current account deficit.

  5. Assess the effectiveness of currency depreciation and fiscal contraction as a way of easing a current account deficit.