Balance of Payments Flashcards
What is the definition of the balance of payments?
The Balance of Payments is a summary statement in which, in principle, all the transactions of the residents of a nation with the residents of all other nations are recorded during a particular period of time, usually a calendar year.
What is the main purpose of the balance of payments?
To inform the government of the international position of the nation and to help it in its formulation of monetary, fiscal, and trade policies.
Why do governments consult the balance of payments of important trade partners?
To help in making Policy decisions
What are some benefits of having the information contained in a nation’s balance of payments?
The information contained in a nation’s balance of payments is indispensable to banks, firms, and individuals directly or indirectly involved in international trade and finance
WHat does an International transaction refer to
The exchange of a good, service, or asset (for which payments is usually required) between the residents of one nation and the residents of other nations.
Are gifts included in a nation’s balance of payments?
Yes, although no payments are required
who is a resident of a nation?
Diplomats, military personnel, tourists, and workers who temporarily migrate are residents of the nation in which they hold citizenship. Similarly, a corporation is the resident of the nation in which it is incorporated, but its foreign branches and subsidiaries are not
What are the two types of international transactions?
International transactions are classified as credits or debits.
What are Credit transactions?
Credit Transactions are those that involve the receipt of payments from foreigners.
What are Debit transactions?
Debit Transactions are those that involve the making of payments to foreigners
How are transactions entered in the nation’s balance of payments?
Credit Transactions are entered with a positive sign, and debit transactions are entered with a negative sign
What are the transactions that are recorded as debit in the nation’s balance sheet?
The import of goods and services, unilateral transfers or gifts made to foreigners, and capital outflows involve payments to foreigners and are entered
What are the two types of capital inflows?
Capital Inflow can take either of two forms: an increase in foreign assets in the nation or a reduction in the nation’s assets abroad.
What is an example of a capital inflow that involves an increase in foreign assets in the nation?
When a U.K. resident purchases a U.S. stock, foreign assets in the United States increase. This is a capital inflow to the United States and is recorded as a credit in the U.S. balance of payments.
What is an example of a capital inflow that involves a reduction in the nation’s assets abroad?
when a U.S. resident sells a foreign stock, U.S. assets abroad decrease. This is a capital inflow to the United States and is recorded as a credit in the U.S. balance of payments because it involves the receipt of a payment from foreigners.
What are the two types of capital outflows and how are they recorded in the balance of payments?
Capital Outflows can take the form of either an increase in the nation’s assets abroad or a reduction in foreign assets in the nation because both involve a payment to foreigners
What is an example of a capital outflow that involves an increase in the nation’s assets abroad?
The purchase of a U.K. treasury bill by a U.S. resident increases U.S. assets abroad and is a debit because it involves a payment to foreigners.
What is an example of a capital outflow that involves a reduction in foreign assets in the nation?
The sale of its U.S. subsidiary by a German firm reduces foreign assets in the United States and is a debit because it involves a payment to foreigners
What are the three types of transactions that are credits (+) in the balance of payments and why?
The export of goods and services, the receipt of unilateral transfers, and capital inflows are credits (+) because they all involve the receipt of payments from foreigners
What are the three types of transactions that are debits (-) in the balance of payments and why?
The import of goods and services, unilateral transfers to foreigners, and capital outflows are debits (-) because they involve payments to foreigners.
What is the name of the accounting procedure used to record a nation’s international transactions?
Double-entry bookkeeping
How many times is each international transaction recorded in the balance of payments?
Twice, once as a credit and once as a debit of an equal amount
What are the two sides of every transaction in the balance of payments?
We sell something and we receive payment for it; we buy something and we have to pay for it
How is a goods export recorded as a credit and a debit in the balance of payments?
A goods export is recorded as a credit in the current account because it leads to the receipt of a payment from foreigners; the payment itself is recorded as a debit in the capital account because it represents a capital outflow from the nation
What are the four main components of the balance of payments?
1) Current Account.
2) Capital Account.
3) Official Reserve Account.
4) Statistical discrepancy
What are the three main components of the current account?
- value of trade in merchandise(goods) and services
- Investment incomes
- Unilateral transfers
What does the value of trade in merchandise and services include?
Included are travel and tourism, transportation costs and insurance premiums
What does the value of trade in merchandise and services include?
Included are travel and tourism, transportation costs and insurance premiums
Services refer to
Trade in services of factors of production, land, labor and capital.
What is the difference between investment incomes and unilateral transfers?
Investments income includes interest and dividends receipts on national assets abroad (credit +) and interest and dividends payed on foreign assets inside the nation (debit -). While , unilateral transfers includes gifts, foreign aid, remittances of workers.
What does the capital account measure?
The change in owned assets abroad and foreign owned assets.
Why are financial reserve assets excluded from the capital account?
changes in reserves reflect government policy rather than market forces
What are the six types of official reserve assets?
a) Monetary gold: gold transactions by the monetary authorities (central banks).
b) Foreign currency bank deposits owned by the monetary authorities.
c) Short term officially held foreign claims (treasury bills)
d) Domestic currency bank deposits owned by foreign monetary authorities.
e) Short term domestic claims owned by foreign monetary authorities.
f) International monetary fund resources.
What is the main purpose of transactions in the official reserve account?
Transactions in the official reserve assets result from imbalances in the current and capital accounts. They are needed to balance international transactions. In other words, to finance imbalances in the current and capital accounts
What is the cause of statistical discrepancy in the balance of payments?
due to errors in data collection and items measurements and estimation.
What are the two main categories of a nation’s owned assets abroad and foreign-owned assets in the nation?
Direct investment and foreign securities
What are some examples of owned assets abroad and foreign-owned assets in the nation?
Direct investment abroad, foreign securities, direct investment in the nation, nation’s treasury securities
This measures the change in the stock of all nonreserve financial assets
What are the reserves for foreign governments?
- Domestic currency bank deposits owned by foreign monetary authorities.
- Short term domestic claims owned by foreign monetary authorities.
What are the two types of transactions that are recorded in the current and capital accounts?
Autonomous transactions and unilateral transfers
What is the term for transactions that involve changes in official reserve assets?
Accommodating transactions
Why transactions in the current and capital accounts are called autonomous transactions?
Because they take place for business or profit motives (except for unilateral transfers) and independently of balance of payments considerations.
Why transactions in official reserve assets are called accommodating transactions?
Because they result from and are needed to balance international transactions.
What is the name of the account that records transactions in official reserve assets and what is another name for its balance?
Official reserve account and official settlements balance
What does a deficit in the balance of payments indicate?
A deficit in the balance of payments occurs when total debits exceed total credits in the current and capital accounts.
How is a deficit in the balance of payments measured?
A deficit in the balance of payments can be measured either by the excess of debits over credits in the current and capital accounts or by the excess of credits over debits in the official reserve account.
What happens when there is a surplus in the balance of payments?
A surplus in the balance of payments occurs when total credits exceed total debits in the current and capital accounts.
How is a surplus in the balance of payments settled?
A surplus in the balance of payments is settled by an equal debit balance (excess of debits over credits) in the official reserve account, which can take the form of increasing foreign reserves in the central bank, investment abroad, or lending to foreign governments.
