Questions on the balance of payments

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.