Current account of balance of payments — practice question

Sweden is a very advanced European nation that enjoys one of the world’s highest standards of living. In 2012, its citizens had an average income of US$49000. The country has a labour force of five million and this workforce is highly skilled. Around 70% of schoolchildren continue on to university. Over time, Sweden has attracted substantial investment and, as a result, each worker has a high value of capital goods to use. In 2012, though, its economic growth rate weakened. The Swedish Government hoped that increasing the retirement age to 67 would raise the country’s economic growth rate. Sweden sells half of its output abroad. Its exports include a range of products such as cars and capital goods. Its imports include petrol, cars and iron. Table 1 shows the balance on the current account of its balance of payments for the period 2008-2013. A country’s trade position is affected by its inflation rate. In fact, if a country’s inflation rate falls, the international competitiveness of its products may improve. The Swedish Government wants the annual inflation rate to stay at 2% or below. If there is a danger that inflation will go above the 2% target, the Swedish Central Bank will increase the interest rate. This change is likely to affect consumer expenditure, investment and the exchange rate. In recent years, Sweden’s inflation rate has stayed low, averaging 1.9% between 2008 and 2013. This low inflation rate gives Swedish firms certainty. Sweden’s best-known firm is probably IKEA, which makes furniture and household accessories. In 2012, it cut its prices which, as had happened before, led to a rise in its revenue. In 2013, its owners said that their chief aim was to make the firm larger by opening new stores all over the world, including in its growing markets in China and Russia.