Balance Of Payments

Question 1

What are the national income accounts?

Answer 1

Accounts that record the value of national income that results from production and expenditure

Question 2

What is GNP?

Answer 2

• the value of all final goods and services produced by a nations factors of production in a given time period

Question 3

What types of expenditure can GNP be broken down into?

Answer 3

1. Consumption
2. Investment
3. Government purchases
4. Current account balance (EX-IM)

Question 4

What adjustments can be made to GNP to make it a more accurate measure of national income?

Answer 4

1. Depreciation
2. Unilateral transfers

Question 5

Describe a negative current account

Answer 5

• you import more than you export
• spending more than you produce/your income
• in order to run a CA deficit borrowing from other countries is required

Question 6

What is GDP?

Answer 6

• another approx. Measure of national income
• measures the final value of all goods and services that are produced within a country in a given time period

Question 7

What is the relationship between GDP and GNP?

Answer 7

GDP = GNP - payments from foreign countries for factors of production + payments to foreign countries for factors of production

Question 8

Describe consumption and investment in a closed economy

Answer 8

In a closed economy:
- Y = C + I + G
- no net exports
- total expenditure = total production

Question 9

Describe savings and investment in a closed economy

Answer 9

• anything not consumed is saved as inventory which counts as investment
• in a closed economy national saving = national investment
  S = I

Question 10

Describe the relationship between GNE, GDP and GNI in a closed economy

Answer 10

In a closed economy:
GNE=GDP=GNI

Question 11

What is an open economy?

Answer 11

• an open economy is one in which trade of goods and services occurs, this includes trade in assets and capital

Question 12

What is the equation for GNP in an open economy?

Answer 12

Y = C + I + G + EX - IM
Or
Y = C + I + G + CA

Question 13

Describe the situation when production (Y) > domestic expenditure (C+I+G)

Answer 13

• in this situation EX > IM
• CA > 0
• CA is running a surplus
• spend less than they produce
• country known as net creditors
• can lend to ROW
• net foreign wealth is increasing

Question 14

What is net foreign wealth?

Answer 14

Net foreign wealth = foreign assets - foreign liabilities

Question 15

Describe the situation when production (Y) < domestic expenditure (C+I+G)

Answer 15

• EX < IM
• country is running a CA deficit
• country generated less income that it spends
• to finance deficit country just borrow from ROW
• net debtors
• net foreign wealth is decreasing

Question 16

What is national saving?

Answer 16

• national is saving is the national income that is not spend on consumption of government purchases

S = Y - C - G

Question 17

In an open economy what is the relationship between CA, savings and investment

Answer 17

CA = S - I
- means savings and investment do not need to be equal as in a closed economy

Question 18

Describe the implications of a CA deficit on savings and investment

Answer 18

• a country that imports more than it exports has low national savings relative to investment
• S < I

Question 19

What does a CA deficit imply

Answer 19

• implies a financial asset inflow or negative net foreign investment

Question 20

What does a CA surplus imply?

Answer 20

S > I
- implies positive net foreign investment
- financial capital outflows

Question 21

What is the trade balance?

Answer 21

TB = EX - IM

Question 22

What is the relationship between GNE and GDP?

Answer 22

GDP = GNE + TB

Question 23

What is the relationship between GDP and GNI?

Answer 23

GNI = GDP + NFIA

Question 24

What is net unilateral transfers (NUT)?

Answer 24

NUT = unilateral transfers country received from ROW - unilateral transfers country sends abroad

Question 25

What is the current account (CA)?

Answer 25

• CA is a tally of all international transactions in goods, services and income occurring though market transactions or transfers

Question 26

What are a country’s balance of payments accounts?

Answer 26

• a record of its payments to and it’s receipts from foreigners
• records flows of goods and services and flows of financial assets across countries

Question 27

Describe the two types of transaction that can occur in the balance of payments accounts

Answer 27

Debit - any transaction resulting in a payment to foreigners

Credit - any transaction resulting in a receipt from foreigners

Question 28

What are the 3 parts of the balance of payment accounts?

Answer 28

1. Current account
2. Financial account
3. Capital account

Question 29

What is the current account?

Answer 29

• accounts for transactions of goods and services

Question 30

What is the financial account?

Answer 30

• accounts for transactions of purchases and sales of financial assets

Question 31

What is the capital account?

Answer 31

• records the transactions of special categories of assets
• I.e non-market or intangible assets

Question 32

What does theory say about the balance of payments accounts?

Answer 32

Im theory:
CA + FA + Capital A = 0

• an international transaction involved two parties and each transaction enters the accounts twice
• once as a credit
• once as a debit