4.6 Balance of Payments Flashcards
What is a “balance of payment”?
A balance of payment (BOP) is a systematic record of all economic transactions between residents of a country and the rest of the world over a period of one year.
What does the “International Monetary Fund (IMF)” do?
Looks at economic and currency stability.
What are “Credit Entries”?
Any transaction that leads to inflow of money is a credit entry.
(Exports, remittances received, inward FDI)
What are “Debit Entries”?
Any transaction that leads to an outflow of money.
(Imports, remittances paid, outward FDI)
What does the “Current Account” include?
- Exports
- Imports
–> Most important!!
+ income (rent, dividends, interest..)
+ Current transfers (remittance, foreign aid..)
What does the “Capital Account” include?
- Capital transfers (debt forgiveness, investment grants..)
- Transactions in non-produced assets (land, mineral rights, forestry rights…)
What does the “Financial Account” include?
- FDI
- Portfolio investment (stocks.. bonds..)
- Reserve assets (foreign currency that the CB can buy/sell
- Borrowing
What is “Current Account Deficit”?
When all factors in the “Current Account” add up to a negative total. (Imports greater than Exports!)
What happens to “AD” if a country faces “Current Account Deficit”?
AD decreases as Net Trade Balance (X-M) falls. This leads to a further fall in real GDP and increase in unemployment.
What happens to “Economic Growth” if a country faces “Current Account Deficit”?
Economic growth decreases as AD falls.
What happens to “Currency Value” if a country faces “Current Account Deficit”?
Decreases in value. In order to import consumers must buy more foreign currency. Therefore, they sell the domestic currency, shifting supply of currency outwards and increasing the supply. This causes currency value to depreciate.
What type of “Inflation” occurs if a country faces “Current Account Deficit”?
Cost-push inflation.
Country’s currency depreciates, therefore the cost of importing (of inelastic raw materials) becomes more expensive. These higher costs of production cause AS to fall, which leads to an increase in price levels.
What happens to “Borrowing By Country” if a country faces “Current Account Deficit”?
Borrowing by country rises. As AD falls and there is less economic activity, the government tax revenue falls. This leads to higher borrowing from abroad to finance any budget deficit.
What happens to “Investor Confidence” if a country faces “Current Account Deficit”?
Investor confidence falls. As AD decreases so does economic growth. Therefore the currency loses it’s value and the governments spending will rely on borrowed money. This causes foreign investors to reevaluate their investment positions.
