Extract Two Flashcards
Balance of Payments Definition
A record of a countries trade and investment in other countries.
Current Account
A record of a countries trade in goods, trade in services, transfers and income.
Financial account
A record of a countries inflows and outflows of financial capital across international borders.
FDI, Banking flows (Hot money), Balance of portfolio flows
Transfers and Income Consistencies
Transfers - EU contributions, overseas aid
Income - Interest, profits and remittances
Exchange Rate
One countries currency in terms of another.
How to improve a CA deficit
Devaluation in the currency.
Devaluation in Currency
Depreciation makes imports dear and exports cheap, potentially leading to increased export demand, assuming they’re price elastic improving (X-M).
Marshall-Lerner Theory
Depreciation will on improve if the PEDx+PEDm>1, as it will be elastic, if inelastic depreciation will worsen the trade balance.
J-Curve Effect
Short Term - D inelastic doesn’t meet Marshall-Lerner
Long Run - Firms adjust to changes, reducing imports, export demand increases.
Initially Marshall-Lerner not met curvature is when it meets
Expenditure Switching
Changing the goods that people buy.
Devaluation domestic cheaper, foreign imports expensive. Consumers switch from foreign imports to domestic goods
Supply side policies make British goods more attractive
Expenditure Reducing
Reduce the amount spent on imports
Encouraging firms to save for investment instead
Free Floating Exchange Rate
Where the countries exchange rate is determined by market forces, changes in demand and supply.
Fixed Exchange Rate
When the government manipulates the value of the currency
Fixed Echange rate problems
Have to change government policy which also changes consumption levels and saving levels. High interest rates reduce appreciations but reduce consumption.
