3.3 Balance of payments Flashcards

1
Q

What is the role of the balance of payments?

A

The balance of payments of a country us ‘a record (usually for a year) of all transactions between the residents of the country and the residents of all other countries’

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2
Q

What are the accounts on the balance of payments?

A
  • Current account
  • Captial account
  • Financial account
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3
Q

What does the current account represent?

A
  • Balance of trade in goods
  • Balance of trade in services
  • Factor rewards/income (wages, rents, interest, profit)
  • Current transfers (e.g. foreign aid)

[it is the largest]

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4
Q

What does the capital account represent?

A
  • Net capital transfers (e.g. debt forgiveness)
  • Non-produced, non-financial assets (e.g. intellectual property, fishing rights)

[it is the smallest]

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5
Q

What does the financial account represent?

A
  • (FDI) Direct investment (physical capital e.g. factories)
  • Portfolio investment (e.g. stocks & bonds)
  • Reserve assets (e.g. foreign currency)
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6
Q

What is credit?

A

Money/value “paid in” on a country’s account

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7
Q

What is debit?

A

Money/value “paid out” on a country’s account.

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8
Q

If there is a debit on the current account, how does this affect the currency?

A

It would cause a surplus of the currency, which would cause depreciation.

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9
Q

If there is a credit on the current account, how does this affect the currency?

A

It would cause a shortage of the currency, which would cause appreciation.

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10
Q

If credits > debits, how do we describe the current account?

A

There is a current account surplus.

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11
Q

If credits = debits, how do we describe the current account?

A

There is a balance of the current account.

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12
Q

What must equal on the balance of payments?

A

Current account + capital account + financial account + net errors and omissions = 0

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13
Q

How does the balance of payments correct in a free-floating exchange rate system?

A

Automatically (through market forces)

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14
Q

How does the balance of payments correct in a fixed exchange rate system?

A

Requires intervention by the government and/or central bank.

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15
Q

How are the current account and financial account related?

A

A current account deficit balances with a financial account surplus.

E.g. Appreciation that has caused a current account deficit (X-M), might cause direct investment to increase.

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16
Q

If there is depreciation and imports are PED inelastic, how would this impact debits/credits on the current account?

A

Increase debits

17
Q

If there is depreciation and imports are PED elastic, how would this impact debits/credits on the current account?

A

Decreases debits

18
Q

If there is depreciation and exports are PED inelastic, how would this impact debits/credits on the current account?

A

Decreases credits

19
Q

If there is depreciation and exports are PED elastic, how would this impact debits/credits on the current account?

A

Increases credits

20
Q

If there is appreciation and imports are PED inelastic, how would this impact debits/credits on the current account?

A

Decreases debits

21
Q

If there is appreciation and imports are PED elastic, how would this impact debits/credits on the current account?

A

Increases credits

22
Q

If there is appreciation and exports are PED inelastic, how would this impact debits/credits on the current account?

A

Increases credits

23
Q

If there is appreciation and exports are PED elastic, how would this impact debits/credits on the current account?

A

Decreases credits

24
Q

What happens to a trade deficit/surplus when the PED of imports and exports sum to above 1, during depreciation?

A

Depreciation would cause a trade deficit to decrease

or a trade surplus to increase.

25
Q

What happens to a trade deficit/surplus when the PED of imports and exports sum to below 1, during depreciation?

A

Depreciation would make a trade deficit larger

or a trade surplus smaller

26
Q

What happens to a trade deficit/surplus when the PED of imports and exports sum to exactly 1, during depreciation?

A

Depreciation would leave the trade balance unchanged

27
Q

What is the Marshall-Lerner condition?

A

Even if PEDM < 1 and/or PEDX < 1, as long as the sum to above 1, depreciation will improve a trade deficit.

28
Q

How does the Marshall-Lerner condition look graphed?

A

Trade balance (X-M) on the y-axis and time on the x-axis.

Starting in a trade deficit, the line is flat (time lags/menu costs), it then briefly goes downwards, as the PED sum is below one, however, once the sum is above one the line curves upwards and goes into a trade surplus.

29
Q

How can a PPF diagram show a trade surplus?

A

A country consumes at a point well within its PPF

30
Q

How can a PPF diagram show a trade deficit?

A

Consumption is a point beyond the PPF.

31
Q

If credits

A

There is a current account deficit.