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Economics (Tina) > Balance of Payments > Flashcards

Balance of Payments Flashcards

1
Q

Balance of payments

A

A record of all transactions (exports, imports, income, transfer and capital flows) that take place between the residents of one country (e.g. Germany) with the residents of all other countries over a period of time.

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2
Q

What is a stock?

A

The stock of a company is sold in units called shares. A stock is a collection of shares

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3
Q

What is a share?

A

A share is a unit of ownership, or equity, in a company or a corporation

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4
Q

What is transfer?

A

Transaction that does not involve an exchange

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5
Q

Debt forgiveness

A

The voluntary cancellation of all or part of a debt obligation

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6
Q

Bonds

A

Bond is a type of loan which is used by big corporations or governments to raise capital by selling IOU to the general public

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7
Q

Direct investment

A

Investment associated with a resident in one country having control or a significant degree of influence on the management of an enterprise that is resident in another economy

(Company to Company movement - Investment)

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8
Q

Portfolio investment

A

A grouping of assets such as stocks, bonds, and cash equivalents

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9
Q

Investment grants

A

Capital transfers made by governments or international organisations to fund specific investment projects

e.g. large construction projects

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10
Q

Payments in Current account

A

Exports/Imports:

  • Goods/Services
  • Visibles/Invisibles

Income: These are different forms of income

  • Wages (for labor)
  • Dividends (for shares)
  • Interest (for capital)
  • Remittances (sent home from workers abroad)

Current Transfers:

  • (Foreign) Aid
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11
Q

Payments in Capital Account

A

(Capital flows)
* Funds
* Debt (& debt forgiveness)
* Government grants
* Capital
* Non-Financial Assets (e.g. Land, Real Estate, Companies)

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12
Q

Payments in Financial Account

A

Financial Assets:

  • Shares
  • Stocks
  • Bonds

Loans

Reserve Assets (e.g. currencies, gold)

Direct Investment
Portfolio Investment

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13
Q

Definition of Current Account

A

Is a measure of the flow of funds from trade in goods and services, income and current transfers

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14
Q

What is Capital Account

A
  • Is a measure of buying and selling of assets between countries

E.g. of assets:

  • Land, Real Estate, Companies
  1. Capital transfers
  2. Transactions in non-produced, non-financial assets

E.g. of Non-produced, non-financial assets:

  • Natural resources
  • Contracts, leases and licenses
  • Marketing assets (brand names, trademarks, logos, sale of franchises, copyrights, domain names)
  • Drilling rights
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15
Q

Definition of Financial Account

A

The net change in foreign ownership of domestic financial assets

  1. Direct Investment
  2. Portfolio Investment
  3. Reserve assets
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16
Q

Financial Assets

A

Non-physical assets whose value is derived from a contractual claim. They are usually more liquid than other tangible assets such as commodities or real estate and may be traded on financial markets

Examples of Financial Assets:

  • Bank deposits at foreign banks
  • Loan to foreigners
  • Stocks and shares (securites of foreign companies)
  • Treasury bills/Government bonds
17
Q

Current Account Balance

A
  • Equal to the sum of the capital account and the financial account

Current account = capital account + financial account

Current - (capital + financial) = 0

Why does it balance?

  • Goods, services and resources traded internationally are paid for; thus every movement of products is offset by a balancing movement of money or some other financial asset
18
Q

What is current account deficit?

A

A current account deficit arises when imports, income and transfers going overseas outweigh exports, income and transfers coming in the domestic economy

Net exports of goods and services + net income from investments + net transfers = Negative

19
Q

What is capital account surplus?

A

A capital account surplus refers to when capital inflows > capital outflows

20
Q

Balance of trade

A

Trade balance is the export of goods - the imports of goods = visible exports - visible imports

Visibles - goods (can be touched)
Invisibles - services (intangible, cannot be touched)

21
Q

Trade deficit vs Current Account deficit

A

A trade deficit only takes into account trade in goods, whereas a current account deficit includes trade in goods, services, income and transfer flows.

22
Q

Export

A

Exports are goods that are sold in a foreign market. Money ends up in your country

23
Q

Imports

A

Imports are foreign goods that are purchased in a domestic market. Money ends up in their country

24
Q

Debit

A

A debit item is a transaction that leads to an outflow of foreign exchange - money flows out

25
Q

Credit

A

A credit item is a transaction that leads to an inflow of foreign exchange - money flows in

26
Q

Causes of Current Account Deficit (Imports > Exports)

A
  • If the economy is at full employment (all resources are used in an economy)
  • If you are less efficient than the rest of the world
27
Q

Causes of Current Account Surplus
(Exports > Imports)

A
  • If the price of a country’s exports increases (and quantity is unchanged).
  • If the economy is in recession then consumers will be cutting down on their consumption of all goods – including imports. Thereby leading to a current account surplus.
  • If a country is more efficient than the rest of the world
28
Q

Causes of Capital Account Surplus (Capital Inflow > Capital Outflow)

A
  • High interest rate regime (when countries pursue high interest rates)
  • A devalued currency may attract a lot of foreign investment.
29
Q

Causes of a Capital Account Deficit
(Capital Inflow < Capital Outflow)

A
  • Running a large debt service (Argentina) - i.e. having to pay back loans
  • To run a current account surplus
30
Q

Consequences of a Current Account Deficit
(Imports > Exports)

A
  • Consumers buys more imports (e.g. economic boom) –> force domestic firms to cut back output, lay off workers –> unemployment
  • Recession
  • Increase in imports of capital goods may lead to a current account surplus in the future
31
Q

Consequences of a Current Account Surplus
(Exports > Imports)

A
  • Can build up foreign reserves
  • Deindustrialization
  • Feedback effects
  • Can be inflationary
  • Depression of domestic living standards
  • Increase demand for exports, improves aggrefate demand and leads to economic growth

Economics (Tina) (15 decks)

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