2.4 Economic Performance and its Indicators - Favourable Balance of Trade Position Flashcards
Define the balance of payments (BOP).
The BOP is a record of a country’s international transactions which involve flows of money between residents of a country and the rest of the world.
What are the various accounts in the BOP?
The BOP consists of three main accounts being the current account (CA), the Capital and Financial Account (KFA) and the Reserve Assets Accounts (RAA).
The CA is then split into the Balance of Trade consisting of both goods and services and the Income Balance consisting of both primary and secondary incomes.
The KFA can be split into direct investments, portfolio investments and financial derivatives and other investments.
What is the purpose of the BOP?
The BOP records different international transactions in various accounts.
What variables affect the current account?
The current account is affected by the inflow/outflow of money from trade and income.
Define the Balance of Trade (BOT) and state and elaborate on the factors that affect it.
The BOT refers to the value of the difference between export revenue and import expenditure.
The BOT is affected by the goods balance (the record of exports and imports of physical goods) and the services balance (the record of exports and imports of services).
Define the Income Balance and state and elaborate on the factors that affect it.
The income balance comprises primary income balance (the record of wages, interest and profits flowing into and out of the country) and secondary income balance (the record of government contributions to and receipts from international organisations and international transfers of money by private individuals).
What is the Capital and Financial Account (KFA) and what affects it?
The KFA is the record of changes in ownership of assets and is affected by direct investments, portfolio investments, financial investments and other investment flows.
NOTE: Acquisition of overseas assets by locals results in an outflow of money whereas acquisition of local assets by foreigners results in an inflow of money.
What is Direct Investment/Foreign Direct Investment (FDI)?
Direct investments is known as long term capital flows and it occurs when a foreign company invests money from abroad in one of its branches or associated companies in the local country (FDI inflow).
What is Portfolio Investment?
Portfolio investments is know as short term capital or hot money and it refers to transactions involving the purchase and sale of financial assets, such as equities, bonds as well as bank deposits and withdrawals.
What is the formula for the BOP?
BOP = CA - KFA + (Net Errors & Omission).
NOTE: A BOP deficit occurs when there is a net outflow while a BOP surplus occurs when there is a net inflow.
What is the reserve assets account (RAA)?
The RAA is the account that records changes in a country’s official foreign reserves, where the official foreign reserves is the amount of foreign currencies held by the central bank.
NOTE: A BOP deficit must be financed by drawing on the official foreign reserves while a BOP surplus allows for an accumulation of official foreign reserves.
