6.4 Current account of balance of payments

In 2019, China's economic growth rate was 6.1% and Chinese households increased their spending. More Chinese people attended sports events and the earnings of top sportspeople increased. China exported more despite a rise in tariffs on some of its products. For example, the US imposed higher tariffs on the imports of Chinese tea and coffee.

d) Discuss whether or not a country with a high economic growth rate will have a deficit on the current account of its balance of payments. [8]

Safiye Ali became the first female doctor in Turkey in 1923. By 2020, 40% of Turkish doctors were women. Over this period, labour productivity increased. Turkey also experience advances in technology, a change in the current account balance on its balance of payments and a significant increase in the size of population.

c) Analyse how advances in technology may improve the current account balance on a country's balance of payments. [6]

Palau is a small island country in the Pacific Ocean. It has received considerable financial support from the US. Living standards are thought to be lower in Palau than in the US. Palau imposes some of the highest tariffs in the world. These trade tariffs affect Palau's current account of its balance of payments. In 2019, commercial bank lending to firms and households in Palau increased.

a) Identify two components of the current account of the balance of payments. [2]

South Africa (SA) experienced a recession in the second half of 2019 and an unemployment rate of 29%. Only a small proportion of this unemployment was frictional. South Africa's foreign exchange rate fell from 1 SA rand = US$0.08 in 2018 to 1 SA rand = US$0.06 in 2019. South Africa had reduced import tariffs, but in 2019 some South African economists suggested tariffs should be used to protect its infant industries.

c) Analyse how a fall in a country's foreign exchange rate could reduce a deficit on the current account of its balance of payments. [6]

The Canadian government has introduced a number of policy measures designed to encourage more women to enter the labour force. Canada's labour force has reduced as its population has aged. The number of workers and their output are influenced by changes in the country's foreign exchange rate and consumer expenditure. In 2018, the Canadian dollar fell in value while Canadian consumer expenditure increased.

c) Analyse how a fall in the value of a country's foreign exchange rate could reduce a deficit on the current account of its balance of payments. [6]

It is estimated that half of Egyptian men smoke. This is one of the highest rates in the world. In recent years the Egyptian government has increased the tax on cigarettes. The government and central bank have also tried to reduce inflation and improve Egypt's international trade performance. The Egyptian government could use subsidies to reduce its deficit on the current account of its balance of payments.

d) Discuss whether or not an increase in government subsidies will reduce a deficit on the current account of the balance of payments. [8]

The election of a new president in South Africa in 2018 led to improvement in business and consumer confidence. Inflation rates fell despite a rise in total demand. One government policy measure established areas known as economic zones where firms pay lower, or no, taxes. These zones encourage domestic firms to become internationally competitive which could reduce the deficit on the current account of South Africa's balance of payment.

a) State two components of the current account. [2]

c) Analyse how a country's current account deficit might be reduced if its firms become internationally competitive. [6]

Mexico has a history of trade deficits. The government is moving the economy closer to free trade, to try to improve its macroeconomic performance. It was predicted in 2017 that Mexico's economy would experience a small rise in its unemployment rate. In 2017 the economy's inflation rate was 6.6%, the highest rate since 2001. A number of policy measures may be used to reduce inflation, including increasing the rate of income tax.

a) Define trade in goods balance. [2]

The use of supply-side policy measures, including deregulation, is moving China closer to a market economic system. Some supply-side policy measures, such as education and subsidies, can also increase a country's economic growth rate. China joined the World Trade Organisation in 2001 and has since removed some quotas on imports and reduced some import tariffs. These measures may influence the size of its current account surplus.

d) Discuss whether or not a reduction in a country's trade protection will reduce its current account surplus. [8]

Economists are uncertain about the future United States (US) macroeconomic performance. For instance, in recent years, US unemployment has fallen while the deficit on the current account of the balance of payments has fluctuated. Whether its current account deficit will rise or fall in the future may be affected by proposed tax cuts. Some economists suggest that the US government should not be concerned about the country's current account deficit.

d) Discuss whether or not a current account deficit on its balance of payments harms an economy. [8]

Ireland has attracted a significant number of foreign multinational companies (MNCs) to set up production in the country. These firms employ approximately 10% of the country's labour force and make a high proportion of Ireland's exports. The surplus on the current account of Ireland's balance of payments fell in 2016 while government spending rose.

c) Analyse how an increase in exports could improve a country's economic performance. [6]

d) Discuss whether or not an increase in government spending will reduce a surplus on the current account of that country's balance of payments. [8]

In 2014, the government of Kazakhstan devalued its currency, the tenge. A year later the country still had a current account deficit. Therefore, in 2016 it considered adopting a floating exchange rate which might help to remove the deficit. However, it had concerns that this might affect the country's inflation rate which was already high at 17%.

d) Discuss whether or not a reduction in a current account deficit on the balance of payments will benefit an economy. [8]

Farms in the USA are getting larger. One dairy farm in the state of Indiana has over 38000 cows. Farms in the USA compete with farms in both developed and developing countries. The value of the farms' exports of milk appears in the trade in goods section of the current account of the USA's balance of payments.

b) Explain how a country could have a trade in goods surplus, but a deficit on the current account on the balance of payments. [4]