The balance of payments: Current account imbalances: impacts

Overview

Recall questions on Current account imbalances: impacts.

What you need to know

Answer each one before you reveal it.

Questions from this subtopic

Each one with the model answer underneath.

1. 1

   How do protectionist policies influence the balance of payments?

   Model answer

   Protectionist policies restrict imports or support exports, potentially improving the current account by reducing import expenditure or increasing export revenue.

2. 2

   Give an example of a protectionist measure that could affect the balance of payments.

   Model answer

   Tariffs on imports, which raise the price of foreign goods and reduce import volumes, potentially improving the trade balance.

3. 3

   How do sources of comparative advantage affect the balance of payments?

   Model answer

   Sources of comparative advantage determine which goods a country can produce at lower opportunity cost, enabling it to export those goods competitively and earn foreign exchange.

4. 4

   Why might a country with strong comparative advantage in services have a current account surplus?

   Model answer

   It can export services competitively, generating significant export revenue that may exceed import expenditure, leading to a surplus.

5. 5

   Define the terms of trade index.

   Model answer

   The terms of trade index measures the ratio of export prices to import prices, expressed as an index.

6. 6

   What does an improvement in the terms of trade indicate?

   Model answer

   It indicates that export prices have risen relative to import prices, meaning a country can purchase more imports for a given volume of exports.

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