Ch7: Balance of Payments

Question 1

What are does the BoP comprise of

Answer 1

Current account, Capital account, financial account

Question 2

What is in the current account?

Answer 2

Trade in goods (M and X)
Trade in services (M and X)
Investment incomes
Net transfers

Question 3

What is in the capital account

Answer 3

Sale or transfer of patents, copyrights, leases and other contracys
-transfer of ownership of non-current assets
-capital transfers

public sector flows of capital in and out the country

Question 4

What is in the financial account

Answer 4

Net balance of flows of FDI
Net balance of portfolio flows
Financial derivatives
Reserve assets

Question 5

what is a surplus/deficit in BOP

Answer 5

in the current account

trade surplus/deficit = only goods

Question 6

What causes a deficit?

Answer 6

When M>X - decrease the XR unless central bank steps in

Question 7

What causes M> X

Answer 7

-UK poor value for money (Fix SSP or protectionist policies)
-Booming UK economy - extra D (dampen demand w tax or derease gov spending)
-XR too high, M are relatively cheaper (reduce XR, J curve dep)

Question 8

What is J curve

Answer 8

BOP
A = start, B = short term impact of decreased XR, C= long term impact of XR

short term impact -low PED for X and M - takes a while to adjust
decrease XR increase sterling cost of imports = more being spent on imports

long term impact E>M BOP higher

Question 9

What is the marshall-lerner condition

Answer 9

if elasticities of demand for M and X > I,
decrease XR will increase trade balance over time

Question 10

What is the balance of trade effected by

Answer 10

volume of X and M
prices of X and M

Question 11

What is terms of trade?

Answer 11

-relative prices of a countries exports to imports

unit value of export/unit value of import