balance of payments Flashcards
what are the three dimensions of an open economy?
goods and services market, financial markets, factor markets
how can you restict goods and services market?
restricted by tariffs quotas and subsidies etc
how can you restict financial market?
capital controls that restrcit certain types of investement and or money movements
what is the relationship between the domestic economy and the size of the trade sector?
there is a positive relationship between the size of the domestic economy and the size of the trade sector
what influences consumer demand for foreign currency?
the exchange rate
what does openness in the financial markets allow?
Fincancial investors to diversify – to gold both domestic and foreign assets and speculate on foreign interest rate movements
Allows countries to buy now and pay later- borrowing
This implies that countries can run for some time deficits and surpluses as if you are in defecit it means running down foreign exchange reserves or borrowing from someone else
what is the balance of payments?
Balance of payments is a record of countrys trade in goods and services and financial assets with the rest of the world during a particular period of time
what are the 3 parts of the balance of payements?
Current account- accounts of flows of goods and services(imports and exports)
Financial account – accounts of flows of financial assets (financial capital)
Capital account- flows of special categories of assets (capitals) such as debt forgiveness
what is the relationship between saving and consumption when income is fixed?
there is a negative relationship as to increase consumption you must decrease saving and vice versa
what are the leakages from the circular flow?
tax, savings and imports
what are the injections into the circular flow?
investment, govt spending, exports
when was the uks consistent trade deficit started?
Since 1970 , we have had a trade deficit
what is the financial account?
accounts of flows of financial assets (financial capital)
what is the current account?
accounts of flows of goods and services(imports and exports)
what is the capital account?
flows of special categories of assets (capitals) such as debt forgiveness
what does the balance of payments add up too?
The balance of payments should add up to 0 – if not there will be a statistical discrepancy to account for it
what is the current account for moth developed countries?
they usually have a current account defecit
what are the current accounts for most emerging economys?
they usually have a current account surplus
what affects countries spending on goods and sevices?
Weather
Rate of interest on saving and borrowing
The culture of spending and saving
Optimism and pessimism
How far the government provides health, education and pension schemes or how big is the welfare state
The level of current incomes is key
what is the main determinent for demand for imports?
domestic incomes
what is the main determinent for demand for exports
foreign incomes
what is the elasticity of cross border flows of liquid capital ie money and explain the effect?
they are highly price elastic so respond to small movement In interest or exchange rates. So just the expectation of a quarter % rise in interest in wall street can cause massive outflows of reserves from emerging markets and into new york
what are the two main issues with using interest rates to attract foreign funds?
High impact of high interest rates on domestic industries- country X cannot use its domestic interest rate to attract foreign funds and simultaneously use monetary policy (low interest rates) to stimulate the micro economy
A country cannot attract inflows of funds to balance its international payments for the long term without having to pay back increasing interest on capital – how long can these interest payments be maintained and how long will the other countrys trust your ability to pay them back
how can you balance a persistent balance of payment defecit?
Devaluation of a nations currency – bring down the price of exports, increase the price of imports
why affects the impact of a devaluation of a currency on the balance of payments?
the impact on this will depend on the elasticity of foreign export demand and home import demand – a country BOP will improve only if the sum of import and export elasticity are together greater than one – marshall lerner condition
what is the only long term sustainable positon for the balance of payments?
The only long term sustainable position is where a country balances its current payments at a level of income which ensures full employment and rates of interest are at the world level
what is the J curve
a curve which shows the balance of payments tend to decrease at first after a devaluation due to the marshall lerner condition not being fufilled in the short term but in long term the demand for imports and exports become more elastic leading to a surplus in long run
