Sold in units called shares. A stock is a collection of shares

Non-physical, liquid assets with value from contracts, tradable on financial markets. Examples of Financial Assets: Bank deposits at foreign banks Loan to foreigners Stocks and shares Government bonds

Balance of Payments Flashcards by T Nguyen

Balance of payments

A record of all transactions between a country’s residents and the rest of the world over time

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What is a stock?

Sold in units called shares.
A stock is a collection of shares

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What is a share?

A unit of ownership, or equity, in a company or a corporation

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What is transfer?

Transaction that does not involve an exchange

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Debt forgiveness

The voluntary cancellation of all or part of a debt obligation

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Bonds

Type of loan used by big corporations or governments to raise capital by selling IOU to general public

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Direct investment

Investment where a resident controls or influences a foreign enterprise.

(Company to Company movement - Investment)

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Portfolio investment

A grouping of assets such as stocks, bonds, and cash equivalents

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(Investment) grants

Capital transfers made by governments or international organisations to fund specific investment projects

e.g. large construction projects

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Payments in Current account

Exports/Imports:

Goods/Services
Visibles/Invisibles

Income: These are different forms of income

Wages (for labor)
Dividends (for shares)
Interest (for capital)
Remittances (sent home from workers abroad)

Current Transfers:

(Foreign) Aid

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Payments in Capital Account

(Capital flows)

Funds
Debt (& debt forgiveness)
Government grants
Capital
Non-Financial Assets (e.g. Land, Real Estate, Companies)

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Payments in Financial Account

Financial Assets:

Shares
Stocks
Bonds

Loans

Reserve Assets (e.g. currencies, gold)

Direct Investment

Portfolio Investment

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Definition of Current Account

A measure of the flow of funds from trade in goods and services, income and current transfers

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What is Capital Account

a measure of buying and selling of assets between countries

E.g. of assets:

Land, Real Estate, Companies

Capital transfers
Transactions in non-produced, non-financial assets

E.g. of Non-produced, non-financial assets:

Natural resources
Contracts, leases and licenses
Marketing assets (patents, trademarks, copyrights)
Drilling rights

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Definition of Financial Account

The net change in foreign ownership of domestic financial assets

Direct Investment
Portfolio Investment
Reserve assets

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Financial Assets

Non-physical, liquid assets with value from contracts, tradable on financial markets.

Examples of Financial Assets:

Bank deposits at foreign banks
Loan to foreigners
Stocks and shares
Government bonds

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Current Account Balance

Current account = capital account + financial account

Current - (capital + financial) = 0

Why does it balance?

International trade involves goods, services, and resources exchanged for money or financial assets.

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What is current account deficit?

imports, income and transfers going overseas > exports, income and transfers coming in the domestic economy
Net exports of goods and services + net income from investments + net transfers = Negative

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What is capital account surplus?

capital inflows > capital outflows

Balance of trade

Trade balance:

Export of goods - the imports of goods = Visible exports - visible imports
Visibles - goods (can be touched)
Invisibles - services (intangible, cannot be touched)

Trade deficit vs Current Account deficit

Trade deficit only takes into account trade in goods
Current account deficit includes trade in goods, services, income and transfer flows.

Export

Exports are goods that are sold in a foreign market. Money ends up in your country

Imports

Imports are foreign goods that are purchased in a domestic market. Money ends up in their country

Debit

transaction that leads to an outflow of foreign exchange - money flows out

Credit

transaction that leads to an inflow of foreign exchange - money flows in

Causes of Current Account Deficit (Imports > Exports)

* If the economy is at full employment (all resources are used in an economy) * If you are less efficient than the rest of the world

Causes of Current Account Surplus (Exports > Imports)

* Price of a country’s exports increases (and quantity is unchanged). * Recession --> consumer cut down consumption, including imports --> export > imports * If a country is **more efficient** than the rest of the world

Causes of Capital Account Surplus (Capital Inflow > Capital Outflow)

* High interest rate regime * A devalued currency may attract a lot of foreign investment

Causes of a Capital Account Deficit (Capital Inflow < Capital Outflow)

* Running a **large debt service** (Argentina) - i.e. having to pay back loans * To run a current account surplus

Consequences of a Current Account Deficit (Imports > Exports)

* Increase imports demand --> reduce domestic output --> causing layoffs and unemployment. (-) * Increase imports demand --> AD decrease --> Recession (-) * Increase in imports of capital goods may lead to a **current account surplus in the future** (+)

Consequences of a Current Account Surplus (Exports > Imports)

* Can build up foreign reserves (+) * Improves AD and leads to economic growth (-) * Deindustrialization (-) * Feedback effects (-) * Can be inflationary (AD increase) (-) * Depression of domestic living standards (-)

Implications of a persistent current account deficit (HL Only)

* Foreign ownership of domestic assets * Exchange rates * Interest rates * Indebtedness * International credit ratings * Demand management * Economic growth

Implications of a persistent current account surplus (HL Only)

* Lower domestic consumption and investment * Appreciation of domestic currency * Reduced export competitiveness * Inflation * Employment

Consequences of a Capital Account Surplus (Inflow > Outflow)

* Provides investment in industries that may lead to further growth (+) * Foreign investment boosts jobs, incomes, skills, and technology transfer, helping local industries grow. (+) * May bid up real estate prices (-) * May lead to foreign ownership of strategic assets (-)

Consequences of a Capital Account Deficit (Outflow > Inflow)

* **Opportunity cost involved in investing in another economy instead of your own (-)** (increase employment and in foreign country) * **Income flows in the future** (US invest in China --> US owned Chinese factory product --> profit back to US)

BOP and Exchange Rates (HL): Current Account

Current account surplus = appreaciation * Demand for export increase = appreaciation Current account deficit = depreaciation * Demand for import increase = depreaciation

BOP and Exchange Rates (HL): Financial Account

Financial account surplus = appreaciation Financial account deficit = depreciation

Ways a government can correct a persistent Current Account Deficit 1 : (HL)

**Expenditure-switching policies:** Policies shifting spending from imports to domestic products

Ways a government can correct a persistent Current Account Deficit 2: (HL)

**Expenditure-reducing policies:** Contractionary monetary/fiscal policies to lower the demand for imports.

Ways a government can correct a persistent Current Account Deficit 3: (HL only)

* Supply side policies * Increase competitiveness

Marshall-Lerner Condition (HL Only)

Depreciation improves the current account if **sum of export and import elasticities is greater than 1.** PED of X + PED of M > 1

J curve effect (HL Only)

Shows the impact of currency depreciation on the balance of trade (BOT) over time

Short run J curve

* Depreciation lowers export prices * Inelastic (time lag) demand may reduce export revenue * Import prices rise --> consumer still purchase bc lack of substitutes * Current acc worsen

Long run J curve

* Demand for M and X are elastic * Foreigners buy export --> revenue rise * Consumer find subs for imports --> revenue fall * Current account improve

Inverse J curve

Shows the effect of currency appreciation in a trade surplus --> worsened BOT initially --> improvement as consumers adjust.