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Macroeconomic Objectives (A2)

The balance of payments: Current account imbalances: causes

  • 3 things to know
  • A2 Units 3 and 4

Overview

Recall questions on Current account imbalances: causes.

What you need to know

Answer each one before you reveal it.

Your recallNot started
Key term

What are factor costs in the context of the balance of payments?

Key term

Explain how exchange rates affect the balance of payments.

Key term

What would happen to a country's balance of payments if its currency appreciated significantly?

Questions from this subtopic

Each one with the model answer underneath.

  1. 1

    Name one factor that influences the balance of payments on the current account.

    Model answer

    Productivity.

  2. 2

    Explain how higher productivity can improve a country's current account position.

    Model answer

    Higher productivity reduces unit costs of production, making exports more price competitive internationally and potentially reducing import demand as domestic goods become relatively cheaper.

  3. 3

    What are factor costs in the context of the balance of payments?

    Model answer

    Factor costs are the costs of inputs used in production, such as labour costs and raw material costs.

  4. 4

    How do lower labour costs affect a country's balance of payments position?

    Model answer

    Lower labour costs reduce production costs, making exports more price competitive and improving the current account by increasing export revenue relative to import expenditure.

  5. 5

    Explain how exchange rates affect the balance of payments.

    Model answer

    Exchange rates influence the price competitiveness of exports and imports; a depreciation makes exports cheaper and imports more expensive, potentially improving the current account, while an appreciation has the opposite effect.

  6. 6

    What would happen to a country's balance of payments if its currency appreciated significantly?

    Model answer

    Exports would become more expensive for foreign buyers and imports cheaper for domestic consumers, likely worsening the current account balance as export revenue falls and import expenditure rises.

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