Current account of balance of payments — practice question

Sweden is a very advanced European nation with one of the world’s highest living standards. In 2012, its people had an average income of US$49000. The country’s labour force of five million is highly skilled. Around 70% of schoolchildren continue on to university. Over time, investment has been high in Sweden, so each worker has a large amount of capital goods to use. In 2012, however, the rate of economic growth slowed. The Swedish Government hoped that increasing the retirement age to 67 would lift the country’s economic growth rate. Sweden sells half of its output abroad. Its exports include a variety of products such as cars and capital goods. Its imports include petrol, cars and iron. Table 1 shows the current account balance of its balance of payments across the period 2008-2013. A country’s trade position is affected by its inflation rate. In fact, a lower inflation rate can make a country’s products more internationally competitive. The Swedish Government wants the annual inflation rate to be 2% or less. 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 spending, investment and the exchange rate. In recent years, Sweden’s inflation rate has stayed low, averaging 1.9% between 2008 and 2013. Low inflation gives Swedish firms certainty. The best known Swedish firm is probably IKEA, which makes furniture and household accessories. In 2012, it cut its prices which, as on earlier occasions, led to an increase in revenue. In 2013, its owners said that their chief aim was to enlarge the firm by opening new stores all over the world, including in its growing markets in China and Russia.