11. International Economics

Question 1

Define the balance of payments and list the three parts.

Answer 1

The balance of payments record international trade and investment transactions. The balance of payment accounts have three parts:

• The current account
• The capital account
• The financial account

Question 2

What is the current account?

Answer 2

It records trade in goods and services and income earned or paid out on international investments.

Question 3

What is the current account balance ?

Answer 3

The overall balance of exports and imports.

Question 4

What is the balance of trade?

Answer 4

The surplus or deficit in trade of goods only.

Question 5

What is the capital account?

Answer 5

It records pubic sector flows of capital into and out of a country. eg government loans to another country.

Question 6

What are the financial accounts?

Answer 6

They record flows of capital to and from the non-government sector, such as direct investment in overseas facilities.

Question 7

Which account are movements in government foreign currency reserves recorded in?

Answer 7

The financial accounts.

Question 8

Define the free floating exchange rate?

Answer 8

They are exchange rates that occur when the exchange rates are left to the market forces and there is no official financing at all. In other words the exchange rate will reflect the interaction of supply and demand for a currency.

Question 9

What is the fixed exchange rate system?

Answer 9

A government policy of buying and selling currency to fixed exchange rates by using its official currency reserves to create an exact match between supply and demand for its currency in the foreign markets. This keeps the exchange rate unchanged.