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Principles Of International Economics > 6. Current Account and Financial Account > Flashcards

6. Current Account and Financial Account Flashcards

1
Q

Whats the Definition of Net Exports?

1.
2.

A
  • aka trade balance
  • exports minus imports (of goods and services), yielding a trade surplus (+) or a trade deficit (-)
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2
Q

Why is analyzing a countries trade not enough?
What are other relevant international flows?

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2.
3.

A
  • it doesn´t give a full picture of a country´s performance relative to the rest of the world
    1. factor payments to/ from abroad (primary income)
    2. transfers to/ from abroad (secondary income)
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3
Q

Relevant international Flows. What is…

  1. primary income
  2. secondary income
A
  1. Primary Income: factor payments to/from abroad; eg: a german consultant works a week at BNP paribas in paris and gets payment from Paris / BMW gets earning from a factory in the USA / a germany student gets dividend from owning an apple share -> all effect this POSITIVELY
  2. Secondary Income: Transfers to/ from abroad: eg: donations from germany citizen to paris for building notre dame / immigrants to germany sending money to Bulgaria (remittances; Überweisung) -> all effect position NEGATIVELY
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4
Q

What the the “Current Account”?

1.
2.
3.
4.

A
  • measures a country´s “performance balance” relative to abroad
  • net flow of payments made to domestic residents from foreign residents (on goods, services, factor payments and transfers)
  • the sum of net exports, net factor payments from abroad and net transfers from abroad, i.e.

(Payments from abroad for exports - Payments to Foreigners for imports)
+
(Factor payments from abroad - Factor Payments to Foreigners)
+ (Transfers from abroad - Transfers to foreigners)

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5
Q

Any Net Change in Current Account needs to be offset by…..

A

corresponding change in Financial Account

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6
Q

What´s the Financial Account? What´s an Example?

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2.
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4.
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A
  • records the increase in domestic assets held by foreigners and the increase in foreign assets held domestically
  • defined to that the net floes in the financial account “offset” the net flows in the current account
  • current account minus financial account = 0
  • i.e. change in current account balance will be matched by a change in the financial account
  • i.e. a country that makes net purchases of goods and services on the world market needs to make net asset sales to foreigners (i.e. net capital inflow) to pay the bill
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7
Q

What the net capital outflows?
They correspond to a ….

A
  • the difference between investment by the home country in foreign countries and foreign investment in the home country
  • net increase in foreign assets held domestically (domestic residents ledning to foreigners) relative to domestic assets held by foreigners (foreigners ledning to domestic residents)
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7
Q

Net exports (X-M) need to be accompanied by…

A

… a net capital outflow (S-I) of the same size

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8
Q

A country runs a current account deficit when it has….

1.
2.
3.

A
  • a negative sum of net exports
  • net payments
  • and net transfers from abroad
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9
Q

When a country has a current account deficit, it must have a… because…

This implies….

A

…. net capital inflow in the financial account, because there needs to be a corresponding fund that pays for the current account deficit

…. a net increase in domestic assets held by foreigners (vs foreign assets held by domestic residents, i.e. the country goes into debt)

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10
Q

if a country has a current account deficit (spending more than it earns), it needs to……

if the country has a current account surplus, ….

A

…. borrow or sell assets to foreigners, leading to a financial account surplus.

…. it will invest abroad and show a financial account deficit.

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10
Q
  1. If the current account is positive, the country…..
  2. if the current account is negative, the country…
A
  1. is earning more than its spending abroad.
  2. spending more than its earning
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11
Q

A country that makes net purchases of goods and services on the world market needs to make….

A

…. net asset sales to foreigners (i.e. net capital inflow) to pay the bill.

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12
Q

What are possible consequences of sustaining a current account surplus over a long time?

Positive:
1.
2.

Negative:
3.
4.
5.
6.

A
  1. increased national wealth (country accumulated foreign assets; net creditor: holding more foreign assets than foreign liabilities)
  2. financial stability: bc not reliant on foreign capital inflows
  3. currency appreciation -> exports become more expensive to foreigners -> reduce competitiveness
  4. reduced domestic investments: country saves more than it invests domestically, i.e. not fully utilizing domestic resources
  5. global trade imbalances: eg tensions with trading partners (US cirticizes Ger doesnt import enough)
  6. over reliance on foreign markets: relying on external demand for goods and services, vulnerable to global economic downturns or trade distruptions
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13
Q

explain this formula:

(S-I) = (X-M)

A
  1. shows that net exports must be equal to net capital outflows
  2. when country exports more than it imports (current account surplus), it ALSO saves more than it invests domestically
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14
Q

domestic savings can also be used to finance….

A

…. domestic government deficit.

15
Q

What is the formula that shows what Savings are made of?

A

S = Y - C - G (savings = GDP - consumption- government spending)

16
Q

Whats the formula for….

  1. private savings
  2. government savings
A
  1. Sp = Y - C - T (GDP - Consumption - Taxes)
  2. Sg = T - G (taxes - government spending)
17
Q

How can we rewrite out Savings Formula (Sp + Sg) so that it stands in relation to the formula (S-I) = (X-M)?

And what can we derive from that?

A

Sp + Sg = I + (X-M)

-> Sp = I + (X-M) + (G-T)

private savings in a country can go into domestic investment (I), purchases of net foreign wealth (X-M) or purchases of new government debt/ financing the government budget deficit (G-T)

18
Q

explain why wrong or right:

If Japan sends financial aid to earthquake victims in Bangladesh, …
1. …this will lead to net asset purchases in the Japanese financial account
2. …this will lead to a more positive Japanese current account
3. …this will lead to a more negative Bangladeshi current account
4. None of the three other answering options provided is correct.

A
  1. WRONG: financial aid is transfer in current account. no direct impact on financial account
  2. WRONG: will lead to more negative current account
  3. WRONG: financial aid is inflow of money in current account; receiving transfers imporves current account (they dont have to pay back)
  4. RIGHT: japan will have more negative current account
19
Q

Ceteris paribus, a country increasing its primary income over time, will tend to…
1. …improve its net foreign wealth position

  1. …worsen its net foreign wealth position
  2. …not affect its net foreign wealth position through this
  3. …experience an ambiguous effect on its net foreign wealth position
A
  1. RIGHT: income earned by residents from abroad; improve current account
  2. no
  3. no
  4. increasing primary income leads to CLEAR positive effect on foreign wealth
20
Q

Net Foreign Wealth | Definition

A

difference between a countrys foreign assets and its foreign liabilities (i.e. is it a net lender or net borrower?)

21
Q

Suppose Germany and France were the only two countries in the world. Suppose that, ceteris paribus, German imports increase. This will…

  1. …increase Germany’s current account.
  2. …improve France’s net foreign wealth position.
  3. …improve Germany’s net foreign wealth position.
  4. …decrease France’s current account
A

IMPORTS!!!!

  1. worsen
  2. RIGHT bc they buy goods from france (germanys current account would worsen)
  3. worsen
  4. no
22
Q

If we have a huge trade surplus, whats some risks that could arise?

1.
2.

A
  • not investing enough domestically, because much of our savings are flowing abroad (in form of investments or loans) -> can lead to underinvestment of our domestic economy
  • other countries complaining about germany stealing jobs -> trade surplus -> exports might be displacing others jobs
23
Q

Whats the formula for

  1. the government budget balance
  2. gov. budget surplus
  3. gov. budget deficit
A
  1. G-T
  2. G-T smaller than 0 is a surplus (spending less than it collects in taxes)
  3. G-T larger than 0 is a deficit (spending more than it collects in taxes)

Principles Of International Economics (8 decks)

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