Balance of Payments on the Current Account flashcards
(29 cards)
Define exports
Goods & services sold overseas
Define imports
Goods and services bought overseas
Define Balance of Payments
Record of all trascations relating to the international trade between one country and the rest of the world in 1 year
Define Current account
A part of the balance of payments where all exports and imports are recorded
Define Current balance
The difference between total exports and total imports
Define Current Account Surplus
When value of exports exceeds value of imports (X>M)
Define Current Account Deficit
When value of imports exceeds value of exports (M>X)
Define Balance of trade
Difference between visible exports and visible imports
Define invisible trade
Trade in services
Define visible trade
Trade in physical goods
Define primary income
Money recieved from the loan of production factors abroad
Define secondary income
money transferred by the gov to and from overseas agencies
Define Exchange rate
price of one currency in terms of another
What occurs during a current account deficit?
M>X meaning money flowing out the country is greater than money flowing in and current balance becomes negative
What occurs during a current account surplus?
X>M meaning money flowing into the country is greater than money flowing out and therefore, having a positive impact on the current account
What is the relationship between the Current account and exchange rates?
If exchange rate appreciates, exports become more expensive and imports become cheap
This results in fewer exports being sold and more imports being bought having a negative impact on the current account
What happens to the currency of a country during a current account surplus?
A country has a surplus on the current account as a result of rising sales of goods abroad hence demand for that country’s currency rises
This leads to an appreciation in the exchange rate
What’s SPICED?
If exchange rate is high, imports become cheap and exports become expensive
If exchange rate is low, imports become expensive and exports become cheap
What are reasons for deficits and surpluses on the current account?
Quality of Domestic Goods
Quality of Foreign Goods
Price of Domestic Goods
Price of Foriegn Goods
Exchange rate between countries
How does leakages from the economy give a current account surplus / deficit
A current amount deficit suggests that a country’s becoming more dependent on imports meaning consumers buy goods produced outside the economy resulting in money flowing out of the economy
This represents a leakage from the economy. It means output and unemployment in the domestic economy are under threat
How does inflation give a current account deficit
A current account deficit may be exposed to inflationary pressures meaning if prices of imports rise, it’ll be reflected in the general price level as CPI is calculated
Rising import prices result in higher domestic inflation levels. The greater the reliance on imports, the greater the threat of inflation when import prices rise
How does low demand exports give a current account surplus / deficit
A current account deficit may not allow a country to sell goods & services abroad. If demand for exports is low, quality of goods is poor or price is too high.
A current account deficit may reflect structural weaknesses in the economy meaning domestic firms may struggle as they aren’t competitive in certain industries
How does funding the deficit give a current account surplus / deficit
A current account deficit may need foreign currency to pay for the rising quantity of imports being bought. if the foreign currency reserves run low, it may be necessary to borrow
Persistent borrowing may cause long term problems.
A current account deficit can be financed by a capital account surplus; flows of a foreign currency can be attracted by a country if its interest rates are high
How does pk give a current account surplus / deficit
