BOP definitions Flashcards
(16 cards)
What is the current account?
The current account shows all transactions involving money received (i.e. income or credits) and money spent (i.e. expenditure or debits) for exports and imports of goods, services, net primary income (investment income) and net secondary income (transfers).
What is the balance of payments?
Record of transactions of the residents of a country with the rest of the world. The three main accounts in balance of payments is the current account, capital and financial accounts.
What are goods?
Goods credits are exports, and goods debits are imports, of merchandise. Exports are divided into rural and non-rural, whilst imports are classified as consumption, capital and intermediate goods.
What are services?
Services credits are exports of services, and services debits are imports of services. Services credits and debits include items such as tourism, travel, education, insurance, transport and finance.
What is net primary income?
Net primary income refers to the earnings on investments, that is, income that is earned as a return from a FOP. It covers interest payments on borrowings and returns on other foreign investments, such as foreign owned companies in Aus or foreign land ownership. When foreigners invest in Aus, income in the form of rent, profits, interest and dividends flows overseas (debit in NPY). When Aussies invest overseas, there is a flow of income back to Aus (credit in NPY).
What is net secondary income?
Net secondary income refers to non-market transfers, that is, income that is not earned through a FOP. These occur when products or financial resources are provided without a specific good or service being provided in return. NSY is small and has little importance in the overall BOP. NSY includes payouts on insurance claims, workers’ remittances (e.g., foreigners working in Aus and sending money overseas), and funds taken out of Aus in the form of unconditional aid to developing nations, pensions received by residents from foreign governments.
What is the capital account?
The capital account consists of two main components. The first item is capital transfers, mainly in the form of “conditional” foreign aid grants (which are linked to specific capital projects) and debt forgiveness. E.g., Aus donation to build a bridge in the Solomon islands. The second component is entries for the purchase and sale of non-produced, non-financial assets – mainly intellectual property rights such as patents, copyrights, trademarks and franchises (such as an Australian company buying the rights from an American company to a operate a Subway outlet in Aus).
What is the financial account?
The financial account component records transactions between parties that involve a change in ownership of Aus assets or liabilities. It is categorised by the type of investment that owners of these assets or liabilities can undertake. Credit entries in the financial account represent net inflows. These come about because of either an increase in foreign investment in Aus or a reduction in Aus investment overseas. Debit entries represent net outflows (a decrease in investment in Aus).
What is direct investment?
Covers foreign transactions to fund new investment in Australia or overseas or to buy more than 10 per cent of shares in an existing company.
What is portfolio investment?
refers to the purchase of land, shares and other marketable securities (that is securities that can easily be sold) in existing companies where the investor has no influence in business operations.
What are financial derivatives?
the value of these investments is derived from the performance of specific assets, interest rates or exchange rates. They involve the exchange of risk between parties rather than funds.
What are reserve assets?
foreign financial assets that are available to and controlled by the central monetary authorities for financing or regulating payment imbalances. They include monetary gold, reserve positions held by the IMF, and foreign exchange held by the RBA.
What is other investment?
residual category that captures transactions not classified to direct and portfolio investment, financial derivatives, employee stock options or reserve assets of the compiling economy. This includes examples such as trade credits, loans, currency and deposits.
How do you calculate the current account?
Net goods + net services (the balance on goods and services) + net primary income (NPY) + net secondary income (NSY)
The capital and financial account is calculated as:
Capital account + financial account (which is: capital account + direct investment + portfolio investment + other investment + reserve assets + financial derivatives).
The balance of payments is calculated as:
CA + KAFA + net errors and omissions = 0
