European Union Trade Balance
Posted in EU Info on 10/06/2010 11:23 pm by admin
Econs question – Balancing of Payments. Please explain your answer as well. thanks?
1. A Jap company builds a factory in the UK with the intention of increasing its sales in the European market.
What is likely to be the long run impact on the UK’s visible trade balance and on its invisibles balance?
A. visible – improve invisible – worsen
B. visible – improve invisible – improve
2. A single country within a monetary union experiences a current account balance of payments deficit.
Which policy could the country use to reduce the deficit?
A. fiscal policy
B. Monetary policy
Q#1:
A. visible – improve invisible – worsen
Visible balance will improve because country will initially export more goods produced on this factory.
Invisible balance will tend to worsen over longer-run because of currency depreciation pressures on local currency (due to higher visible BOT) which makes foreign services relatively cheaper, thus outsourcing will tend to be higher.
Q#2:
A. fiscal policy
Single country can not use monetary policy because separate body controls it ( ECB in EU ) which is independent from single country influence.
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