balance of payment

Question 1

balance of payments

Answer 1

the difference in total value between payments into and out of a country over a period.

Question 2

current account

Answer 2

the sum of the balance of trade (goods and services exports less imports), net income from abroad and net current transfers.

Question 3

financial account

Answer 3

components include direct investment, portfolio investment and reserve assets, and are broken down by sector.

Question 4

components of the current account

Answer 4

• goods
• services
• income balance
• transfers balance

Question 5

the current account balance

Answer 5

sum of all the components of the current account
deficit = negative number
surplus = positive number

Question 6

components of financial account

Answer 6

-physical asset
-financial investments
-capital account
a deficit in the current account means there is a surplus in the financial account

Question 7

floating exchange rate and the balance of payment

Answer 7

the result if the changing exchange rate is balanced trade over time between the two countries

Question 8

consequences of current account deficit

Answer 8

• depreciation of the currency
• increased foreign ownership
• higher interest rates
• increase indebtness

Question 9

current account and the exchange rate

Answer 9

under a floating exchange rate system, imbalances in the current account should be self-correcting

Question 10

correcting a current account deficit

Answer 10

• exchange rate devaluation
• expansionary monetary policy
• use of protectionism
• contractionary fiscal policy

Question 11

marshall lerner condition

Answer 11

a currency devaluation will only lead to an improvement in the balance of payments if the sum of demand elasticity for imports and exports is greater than one

• nations currency will cause its current account to move towards surplus depends of the price elasticity of demand for exports and imports
• if MLC is met then devaluating currency would reduce deficit
• If MLC not met: devaluating would worsen it

Question 12

the J curve

Answer 12

refers to the way and the time frame in which the trade balance
may initially worsen before it improves, after a depreciation of the exchange rate.

Question 13

consequences of persistent current account

Answer 13

• appreciation of the currency
• increased ownership of foreign asset
• reduced level of domestic consumptions
• possibility of increased protectionism

Question 14

official reserves

Answer 14

any kind of reserve funds that can be passed between the central banks of different countries.

Question 15

capital account

Answer 15

the net result of public and private international investments flowing in and out of a country.

Question 16

financial investment

Answer 16

a monetary asset purchased with the idea that the asset will provide income in the future or appreciate and be sold at a higher price.

Question 17

physical assets

Answer 17

might include a company’s production equipment, its liquid funds, its product stock and any property it owns.

Question 18

surplus

Answer 18

the amount of an asset or resource that exceeds the portion that is utilised

Question 19

deficit

Answer 19

the amount of an asset or resource that exceeds the portion that is utilised