6. Balance of Payments Flashcards
What is the balance of payments?
A record of all economic transactions between residents of a country and the rest of the world over a specific period.
Name the two main components of the balance of payments.
The current account and the capital and financial account.
What does the current account include?
Trade in goods and services, income from abroad, and current transfers.
Define the capital and financial account.
It records cross-border investments in financial assets and liabilities, including direct investment, portfolio investment, and other investments.
What is a current account surplus?
When a country’s exports of goods, services, and income exceed its imports, leading to a positive balance.
What is a current account deficit?
When a country’s imports of goods, services, and income exceed its exports, resulting in a negative balance.
How can a country finance a current account deficit?
By attracting foreign investment, borrowing from international lenders, or using foreign exchange reserves.
What role do remittances play in the balance of payments?
Remittances are transfers of money by foreign workers to their home countries, contributing positively to the current account.
What is the significance of the balance of payments for a country’s economy?
It provides insights into a country’s economic transactions with the rest of the world, indicating economic stability and influencing exchange rates.
