Balance of payments Flashcards
What is the balance of payments?
an accounting structure to measure how much money is entering and leaving a country
what are the three main parts of BoP?
The current account, the capital account, and the financial account
What does the current account measure?
the flow of funds from trade of goods and services + other income flows
what does the financial account measure?
the flow of money used for investments, loans, and other assets like foreign currencies
what does the capital account measure?
measures the flow of money spent on capital
Define the term bilateral trade agreement
a trade pact between two countries that establishes terms and conditions for trade between them
what does a deficit refer to?
more money going out than coming in
define the term invisible trade
the exchange of services, intangible goods, and other non-physical assets between countries
define the term visible trade
the exchange of physical goods between countries, involving items that can be seen, measured, and shipped
how do you calculate visible trade balance?
VisibleExports − VisibleImports
How do you calculate financial account balance?
NetDirectInvestment + NetPortfolioInvestment (investments and assets)
How do you calculate current account balance?
VisibleTradeBalance + InvisibleTradeBalance + NetProperty income +NetCurrentTransfers
how would you calculate net errors and omissions?
current account balance + capital and financial account balance
What is the relationship between the current account and a countries exchange rate?
A current account deficit usually weakens the currency, while a surplus strengthens it
How would exchange rate devaluation/depreciation help to correct a current account deficit?
devaluing currency makes exports cheaper and imports more expensive.
This would increase exports and reduce imports, helping to balance the current account
