Lecture set 1 Flashcards
(31 cards)
T/F: It is known that trade flows are larger than capital flows
False, Capital flows are larger than trade flows. These are though only estimates.
How are capital flows defined?
Investment money associated to buying/selling of assets globally.
What is the Balance of Payments (BOP) for a country?
An annual income statement for a country.
What has to balance in the BOP?
Income and expenditure
How does a country generate income over time?
By selling goods, services and/or assets to foreigners.
In the country generates an income, what happens to the BOP?
The BOP goes up.
What actors prepare the annual BOP?
National governments, large international organisations like the IMF
Why is it so difficult to prepare the BOP?
Because only tangible goods have physical evidence of, not services and assets traded.
What can BOP statements influence?
- Investment decisions
- Government policy decisions
- Interest rates
- Exchange rates
- Business practices
Which are the two main accounts in the BOP statement?
Currenct account and the capital financial account
What kind of transactions get recorded in the current account?
The buy and sell of goods and services
What kind of transactions get recorded in the capital account
The buy and sell of various assets
If a country has a trade balance described as X-M>0 then it must be
Running a trade surplus in the current account thus becoming a net seller.
If a country has a trade balance described as X-M<0 then it must be
running a trade deficit in the current account thus becoming a net buyer.
The gross national product (GNP) measures the value of produced goods and services, but what does it not include?
It does not include intermediate goods i.e. “half finished goods” only produced and sold goods.
Savings can be mathematically shown as
S=Y-C-G
If S>I then what does that mean for X and M?
X>M and we do have a trade surplus
If a policy change does not have any effect on S or I will it have any effect on the trade balance?
No
Can a government budget deficit have effect on the trade balance?
Yes, Because of the deficit, it means that Savings go down thus depreciation in I too, but if I is held fix, there is going to be a pressure on X-M to go down too. Resulting in a trade deficit, the country is a net buyer, thus trade deficit in the current account.
Are current account surpluses desirable?
It depends, conventional wisdom says yes, but Economic theory and empirical evidence suggest otherwise.
Say a country has a large X, why do they have that, name 5 possibilities.
- Exporting country charge low price for high quality
- The country is abundant in natural resources, i.e. oil.
- Industry is successful because of low wages.
- Government policy make it easy because they construct policy from mercantilist ideas.
- Devalue the currency to obtain a current account surplus so that the goods are being cheaper to foreigners and jack up the exports.
There are two main ways to explain large X in terms of trade flows and capital flows.
Trade flows: Import spending is normal but the country is a massive exporter, or import is very small.
Capital flows: Large S, domestic savings are high, i.e. capital flight. Small I, means that the country is in a recession.
Say a country has a Small M, why do they have that, name 3 possibilities.
- Consumers are highly nationalistic, they prefer domestically produced goods, there is a HOME BIAS. High price is necessary to maintain home bias which is bad for consumer welfare.
- Government policy is designed to reduce import spending. This through import tariffs and import quotas. To block M and protect domestic industry.
- Marketing
Large Say a country has a large S, why do they have that, name 3 possibilities.
- Large S indicates low consumption spending which means lower standard of living. Domestic firms must export everything they produce because nobody at home is being-weak economy.
- Welfare system is bad, you need savings for unpredicted circumstances.
- Government policy, by increasing savings rate
