Balance of payments

Question 1

balance of payments account

Answer 1

record of the value of all transactions between residents in one country and those of all the other countries over a given time period. current, capital and financial account; all must be balanced

Question 2

credit

Answer 2

any transaction that brings money into a country from abroad positive value

Question 3

debit

Answer 3

transaction that makes money leave country

Question 4

current account

Answer 4

measure of the flow of funds from trade in goods or services + other income flows

• balance of trade in goods
• balance of trade in services
• income
• current transefers

Question 5

balance of trade in goods

Answer 5

(visible trade balance/ merchandise account balance) measure of the revenue received from tangible exports - expenditure on tangible imports over a given time period

Question 6

balance of trade in services

Answer 6

(invisible balance/ services balance) measure of revenue from exports of services - expenditure on imports of services over a given time period

Question 7

income (part of current account)

Answer 7

measure of net monetary movement of profit, interest and dividends into and out of a country over given time period (firms may set up branches in other countries and any profits show as positive on this, investors in foreign banks get interest shown as positive, dividends from shares in foreign companies)

Question 8

current transfers

Answer 8

measure of net transfers of money, between countries, but no goods exchanged (foreign aid/ foreign workers sending money back to families)

Question 9

capital account

Answer 9

capital transfers and transactions in non-produced, non-financial assets

Question 10

capital transfer

Answer 10

debt forgiveness transfers relating to fixed assets (use in production)

inheritance tax

death duties

Question 11

capital transfers and transactions in non-produced, non-financial assets

Answer 11

land/ patents/ rights to natural resources, copyrights

Question 12

financial account

Answer 12

measures the net change in foreign ownership of domestic financial assets. (surplusif foreign ownership faster than domestic ownership)

Question 13

factors that affect the BoP

Answer 13

• trade in goods and services.
• exchange rate (depends on PED).
• inflation (depends on relative nations).
• non-homogeneous products (cars..).
• global aggregate demand (depends on YED)

Question 14

consequences of current account deficit

Answer 14

• AD decreases.
• Inflation decreases (depends on where LRAS, capacity).
• Unemployment increase (demand deficient)
• Growth decrease
• balanced by financial/capital account surplus

Question 15

Why a current account deficit achieved(analysis)

Answer 15

• spending (individual/firm) too much on imports (Malaysia used to gain tech).
• exports not high enough-competitiveness?
• both need finances.
• run down savings and investment abroad.
• borrow from foreign lenders (may become less willing).
• if growth faster than deficit, problems.
• vulnerable to international credit crunches.

Question 16

methods for correcting BoP

Answer 16

3 Ds

• Deflation (Expenditure reducing) monetary and fiscal policy
• Devaluation (expenditure switching) interest rates, QE, buying reserves
• Direct controls (expenditure switching) protectionism

Question 17

consequences of current account surplus

Answer 17

• AD increases.
• Inflation increases (depends on where LRAS, capacity).
• Unemployment decrease (demand deficient)
• Growth increase (exports can drive, like China)
• balanced by financial/capital account deficit

Question 18

why current account surplus

Answer 18

money useless for own sake. purchase foreign assets. protect structural changes (Jap spends to support aging pop)

Question 19

devaluation

Answer 19

makes imports more expensive, export less. key factors: size, duration, elasticity)

Question 20

Marshall-Learner condition

Answer 20

where PED exports + PED imports > 1 (if not, then devaluation harms BoP more)

Question 21

analysis of devaluing a currency

Answer 21

SR/LT: effective to start, but will plateau (BoP balanced)

stakeholders:

• Exports - initially suffer, but gain;
• Imports - initially gain then suffer (J-curve);
• consumers - fewer goods, because C decreases;
• gov loses tariff rev Adv/Diadv

Question 22

components of the finacial account

Answer 22

3 components:

• DIRECT INVESTMENT (purchase of foreign long-term assets, Foreign Direct investment [includes property, business, shares or stocks]) eg China in Africa
• PORTFOLIO INVESTMENT (stock and bond purchases not causing lasting interest in an economy)
• RESERVE ASSETS (gold + foreign currency)