6.3 Current Account Of The Balance Of Payments Flashcards
What are the four components of the current account?
- Trade in goods
- Trade in services
- Primary income
- Secondary income
What is included in trade in goods?
Exports and imports of physical products, e.g. machinery, food, oil.
What is trade in services?
Exports and imports of intangible goods, e.g. tourism, banking, transport.
What is primary income?
Returns from factors of production abroad—e.g. interest, dividends, wages.
What is secondary income?
Transfers between countries with no exchange of goods/services—e.g. remittances, foreign aid.
What is a current account surplus?
When total credits (money in) exceed total debits (money out).
What is a current account deficit?
When total debits exceed total credits.
Formula for balance of trade in goods?
Value of goods exports – Value of goods imports
Formula for balance of trade in services?
Value of services exports – Value of services imports
How do strong domestic currencies affect the current account?
Make exports more expensive and imports cheaper, increasing the deficit.
How does high consumer spending contribute to a deficit?
Increases demand for imports, worsening trade balance.
How do terms of trade worsening impact the current account?
A fall in export prices relative to import prices reduces export earnings.
How does a current account deficit affect the exchange rate?
May depreciate due to excess supply of domestic currency.
How does a surplus affect other countries?
Can lead to global imbalances and trade tensions.
What policy can reduce a current account deficit?
Demand-reducing policies like contractionary fiscal/monetary policy.
How can supply-side policies help the current account?
By improving competitiveness, thus boosting exports.
