Balance of Payments Flashcards
definitions
balance of payments: record of all transactions relating to international trade
capital and financial account: that part of the balance of payments where flows of savings, investment and
currencies are recorded
current account: part of the balance of payments where all exports and imports are recorded over a period of time
exports: goods and services sold overseas
imports: goods and services bought from overseas
current account deficit: when value of imports exceeds the value of exports
current balance: difference between total exports and total imports (visible and invisible)
balance of trade/visible balance: difference between visible exports and visible imports
invisible trade: trade in services- goods visible
primary income: money received loan of production factors abroad
secondary income: government transfers to and from overseas agencies
exchange rate: price of one currency in terms of another affect current account, rising sales increase demand for currency strengthen exchange rate
reasons for deficits and surpluses
quality of domestic/foreign goods: high quality goods increased demand exports rising sales overseas + CAB
g&s overseas superior demand imports increase less demand domestic goods lower domestic output threaten employment
price of domestic/foreign goods: price heavily influences especially if price elastic - rapid inflation
overseas cheaper rapid increase demand for imports reducing surplus/worsening deficit
exchange rate: lower boost demand for exports makes imports more expensive lowers demand benefitting current account balance
impact of current account of deficit
leakage from economy: persistent deficit suggest country increasingly dependent of imports money flows out the economy to overseas firms - leakage from the economy meant output & employment levels threatened in the domestic market
inflation: prices of imports rise reflected in CPI imports account for many of the goods result in higher inflation levels domestically - higher reliance higher threat when prices up
low demand for exports: signify struggle to sell goods abroad quality/price may be too high decline in economic growth / unemployment - reflect structural weakness domestic firms not competitive in certain industries
funding the deficit: need foreign currency to pay for rising quantity of imports - foreign reserves low may need to borrow long-term problems / CA deficit financed by capital account surplus flow of foreign currency attracted if interest rates are high.
AO4 depends on size of country’s deficit in relation to amount of international trade done by country
