Balance of payments Flashcards
What is the balance of payments?
The balance of payments summarises the economic transactions of an economy with the rest of the world. These transactions include exports and imports of goods, services and financial assets, along with transfer payments.
What is the current account?
The current account represents a country’s imports and exports of goods and services, payments made to foreign investors, and transfers such as foreign aid.
What are examples of trade in goods?
Records exports and imports of visible items.
consumer goods, such as television sets and clothing
What are examples of trade-in services?
Telecommunications, Computer and information, banking, transportation,
What does primary income consist of?
It records, IPD
Interest
Profit
Dividends
These are Rewards for capital investments
What is secondary income?
It records movements of funds for which there is no corresponding exchange of goods and services.
For example; worker remittance, donations, tax payments, foreign aid, and grants.
What is the capital account?
It records the transfers of the ownership of assets.
Examples is
01) foreigner’s purchase of a U.S. copyright to a song, book, or film.
02) acquisition or disposal of non-current assets
03) purchase or sale of land
04) debt forgiveness
What is the financial account?
It records the movement of money in the form of investments.
Examples ;
01) Foreign direct investment ; A foreign direct investment is an investment in the form of a controlling ownership in a business in one country by an entity based in another country.
02) Portfolio investment ; Records flow of money to purchase shares, ( no controlling interest )
03) Other investments ; investments other than direct and portfolio investments, trade credit, loans, purchase of currency, bank deposits
What are the causes of a current account deficit?
01) cyclical deficit - Increase of the import expenditure or decrease in the export revenue, due to limited domestic production, so that the country relies on imports.
02) Structural deficit - This occurs due to an appreciation in the exchange rate, causing export prices to rise and import prices to fall
03) Rate of inflation - It makes exports and domestic goods expensive. If it is higher than its competitors, exports fall and imports rise.
04) Period of expansion - It may lead to increased consumer spending and economic growth. This may involve importing capital equipment and machinery, leading to a persistent deficit.
05) Lack of confidence- This may be due to a persistent current account deficit or large government budget deficits. Investors may then fear political change and the lack of stability of the government.
06) Trade restrictions - Trade restrictions imposed by other countries will increase the price of exports, and reduce the cash inflows.
What are the consequences of a current account deficit?
01) An increase in external debt - The government may borrow funds to pay for imports.
02) The country’s output & employment would fall - Since AD is low, domestic production may decrease
03) It may reflect structural weaknesses - This means domestic firms will struggle because they are not competitive.
04) Downward pressure on the exchange rate - An increase in imports will increase the supply of domestic currency in the forex, leading to depreciation.
What are the consequences of a current account surplus?
01) More exports = more job opportunities = economic growth
02) Country’s AD rises, living standards of the people rise.
03) Domestic shortages may occur - as many goods are being exported, less availability of goods in the country
04) When there is a surplus, the exchange rate value will rise, which may increase export prices, reducing international competitiveness, leading to a deficit in the long run.
