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Macro Year 13 > Chapter 3 - Balance of Payments > Flashcards

Chapter 3 - Balance of Payments Flashcards

1
Q

Balance of Payments

A

Record of all financial transactions made between countries, businesses and government in one country with others

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2
Q

Outflows

A

Exports
Positive entry

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3
Q

Inflows

A

Imports
Negative entry

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4
Q

Current account

A

Balance of trade in goods and services
Net primary income
Net secondary income

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5
Q

Capital account

A

Transfer of funds associated with buying fixed assets

(small)

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6
Q

Financial

A

FDI - investment from abroad
Portfolio investment - savings, bonds
Hot money flows

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7
Q

Current + capital

A

Show whether the economy is a net leander to the rest of the world, or a net borrower to the rest of the world
It is equal to the financial account

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8
Q

BOP Deficit

A

Imports > Exports

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9
Q

Causes of deficits

A

Low productivity - not internationally competitive
High inflation rate
Overvalued ER
Dependency on highly priced imported materials
Relocation of industries in low wage countries
Protectionism in other countries

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10
Q

BOP Surplus

A

Exports > Imports

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11
Q

Causes of surplus

A

High productivity - internationally competitive
Low inflation rate
Undervalued ER
Abundance of highly priced exported materials
Relocation of industries from high wage countries
Protectionist policies designed to reduce imports

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12
Q

Policies to reduce a current account deficit

A

Devaluation of the ER
Demand side policies
Supply side policies

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13
Q

Devaluation of the ER (to reduce a CAD)

A

Make exports cheap and imports expensive
- Decrease imports and increase exports - improvement
EVAL: depends on the elasticity of exports and imports
- Marshall Learner condition - only works if PEDm and PEDx > 1
- J curve: time lags and links elasticity and current account -> demand in the short run is more inelastic
SUBEVAL:
- Can lead to imported inflation - cost push inflation
- Depends on inflation
- Depends on consumer spending

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14
Q

Demand side policies (to reduce a CAD)

A

Reduce AD and inflation - tightening monetary and fiscal policy

Monetary policy
- Increase the IR - increase cost of debt, decrease consumption of imports and exports become more competitive
EVAL: hot money flows lead to an appreciation

Fiscal policy
- Increase income tax - decreases disposable income - decreases spending on imoprts
EVAL: a fall in AD will lead to a rise in unemployment

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15
Q

Supply side policies (to reduce a CAD)

A

Improve the competitiveness of an economy and make exports more attractive
- Education
- Training
- Privatisation
EVAL: takes a lot of time to have an effect

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16
Q

Other policies to reduce a CAD

A

Lower wages - decrease COP, so improve competitiveness - internal devaluation
- EVAL: a fall in AD will lead to deflation
Protectionism
- EVAL: retaliation

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17
Q

Export reducing

A

Decrease demand, thus decreasing spending on imports

18
Q

Export switching

A

Switch consumer spending towards domestic goods rather than imported goods

19
Q

Why do CADs and CASs not matter?

A

CAD may be the result of an increase in economic growth
CAD and a surplus in the capital or financial account is OKAY
CAD only matters if it is a large percentage of a country’s GDP

20
Q

Exchange rates

A

The rate at which one currency trades against another on the foreign exchange market

21
Q

Floating exchange rates

A

The value of the currency is determined by the market forces

22
Q

Fixed exchange rates

A

Government or central bank seeks to keep the value of a currency at a certain level

23
Q

Managed exchange rates

A

Market forces determine the value, which is calculated and set by the central bank

24
Q

Revaluation

A

Fixed exchange rates
- Government or central bank increase the value of the currency

25
Q

Appreciation

A

Floating exchange rates
- Value of the currency increases

26
Q

Devaluation

A

Fixed exchange rates
- Government or central bank decrease the value of the currency

27
Q

Depreciation

A

Floating exchange rates
- The value of the currency falls

28
Q

Foreign currency transactions (government intervention in ER)

A

Involves the central bank buying or selling a currency
- Increase the value by buying their own currency, which decreases the supply and increases the price

29
Q

Interest rates (government intervention in ER)

A

Cost of borrowing, and the reward for saving
- An increase in IR leads to hot money flows, which increase demand for the currency and thus appreciate it

30
Q

Hot money flows

A

Short-term investments that move swiftly between different countries or financial markets in search of higher returns.

31
Q

Quantitative easing (government intervention in ER)

A

Central bank buys financial assets in exchange for money to increase borrowing and lending
- Means there is less money supplied, so the value rises

32
Q

Factors affecting ER

A
  1. Inflation - low inflation leads to stronger currencies - more countries will import their products - increase demand of their currency
  2. IR - high IR = increase local currency rates
  3. CAD - CAD is higher than that of a trading partner, this can weaken its currency relative to that country’s currency
33
Q

Competitive devaluation

A

One country strategically devaluates its currency
Can negatively impact trading

34
Q

Impact of changes in exchange rates

A

CAD
Economic growth and unemployment
- ER appreciates: AD falls
- ER falls: increase exports
Inflation
- Depreciation of ER = inflationary
FDI
- Depreciation = wages and COP fall = country is more internationally competitive, which increases the likelihood of FDI

35
Q

International competitiveness

A

The ability of a country to compete in international markets

36
Q

How to measure international competitiveness

A
  1. Relative productivity rates - output/hour
    EVAL: only takes into account one factor, it is thus better to use multifactor productivity rates
  2. Relative unit labour costs - total wages/real output
    - RUI increase - country is less internationally competitive
  3. Relative export prices
    - REP increase - country is less internationally competitive
37
Q

Factors influencing competitiveness

A
  1. Productivity increases - increase in international competitiveness, due to a decrease in unit labour costs
  2. Quality of human capital increases, thus productivity increases, which decreases labour costs, which increases competitiveness
  3. ER falls - increase competitiveness
38
Q

Policies to increase international competitiveness

A

Education and training
Investment incentives - subsidies/decreasing tax or IR
Privatisation and deregulation - increase or decrease barriers to entry
Depreciating ER - export prices fall which increases competitiveness
Trade liberalistion
Taxation

39
Q

Benefits of international competitiveness

A

Increased exports
Job creation
Higher standards of living
FDI

40
Q

Problems of international uncompetitiveness

A

Trade deficits
Economic decline
Unemployment
Income inequality

Macro Year 13 (6 decks)

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