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Economics (Vicky) REAL one > Balance of Payments > Flashcards

Balance of Payments Flashcards

1
Q

Balance of payments

A

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

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2
Q

What is a stock?

A
  • Sold in units called shares.
  • A stock is a collection of shares
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3
Q

What is a share?

A

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

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4
Q

What is transfer?

A

Transaction that does not involve an exchange

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5
Q

Debt forgiveness

A

The voluntary cancellation of all or part of a debt obligation

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6
Q

Bonds

A

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

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7
Q

Direct investment

A

Investment where a resident controls or influences a foreign enterprise.

(Company to Company movement - Investment)

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8
Q

Portfolio investment

A

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

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9
Q

Investment grants

A

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

e.g. large construction projects

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10
Q

Payments in Current account

A

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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11
Q

Payments in Capital Account

A

(Capital flows)

  • Funds
  • Debt (& debt forgiveness)
  • Government grants
  • Capital
  • Non-Financial Assets (e.g. Land, Real Estate, Companies)
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12
Q

Payments in Financial Account

A

Financial Assets:

  • Shares
  • Stocks
  • Bonds

Loans

Reserve Assets (e.g. currencies, gold)

Direct Investment

Portfolio Investment

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13
Q

Definition of Current Account

A

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

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14
Q

What is Capital Account

A
  • a measure of buying and selling of assets between countries

E.g. of assets:

  • Land, Real Estate, Companies
  1. Capital transfers
  2. 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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15
Q

Definition of Financial Account

A

The net change in foreign ownership of domestic financial assets

  1. Direct Investment
  2. Portfolio Investment
  3. Reserve assets
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16
Q

Financial Assets

A

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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17
Q

Current Account Balance

A

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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18
Q

What is current account deficit?

A
  • 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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19
Q

What is capital account surplus?

A

capital inflows > capital outflows

20
Q

Balance of trade

A

Trade balance:

  • Export of goods - the imports of goods = Visible exports - visible imports
  • Visibles - goods (can be touched)
  • Invisibles - services (intangible, cannot be touched)
21
Q

Trade deficit vs Current Account deficit

A
  • Trade deficit only takes into account trade in goods
  • Current account deficit includes trade in goods, services, income and transfer flows.
22
Q

Export

A

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

23
Q

Imports

A

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

24
Q

Debit

A

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

25
Q

Credit

A

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

26
Q

Causes of Current Account Deficit (Imports > Exports)

A
  • 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
27
Q

Causes of Current Account Surplus
(Exports > Imports)

A
  • 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
28
Q

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

A
  • High interest rate regime
  • A devalued currency may attract a lot of foreign investment
29
Q

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

A
  • Running a large debt service (Argentina) - i.e. having to pay back loans
  • To run a current account surplus
30
Q

Consequences of a Current Account Deficit
(Imports > Exports)

A
  • 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 (+)
31
Q

Consequences of a Current Account Surplus
(Exports > Imports)

A
  • 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 (-)
32
Q

Implications of a persistent current account deficit (HL Only)

A
  • Foreign ownership of domestic assets
  • Exchange rates
  • Interest rates
  • Indebtedness
  • International credit ratings
  • Demand management
  • Economic growth
33
Q

Implications of a persistent current account surplus (HL Only)

A
  • Lower domestic consumption and investment
  • Appreciation of domestic currency
  • Reduced export competitiveness
  • Inflation
  • Employment
34
Q

Consequences of a Capital Account Surplus
(Inflow > Outflow)

A
  • 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 (-)
35
Q

Consequences of a Capital Account Deficit
(Outflow > Inflow)

A
  • 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)
36
Q

BOP and Exchange Rates (HL): Current Account

A

Current account surplus = appreaciation

  • Demand for export increase = appreaciation

Current account deficit = depreaciation

  • Demand for import increase = depreaciation
37
Q

BOP and Exchange Rates (HL): Financial Account

A

Financial account surplus = appreaciation

Financial account deficit = depreciation

38
Q

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

A

Expenditure-switching policies:

Policies shifting spending from imports to domestic products

39
Q

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

A

Expenditure-reducing policies:

Contractionary monetary/fiscal policies to lower the demand for imports.

40
Q

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

A
  • Supply side policies
  • Increase competitiveness
41
Q

Marshall-Lerner Condition (HL Only)

A

Depreciation improves the current account if sum of export and import elasticities is greater than 1.

PED of X + PED of M > 1

42
Q

J curve effect (HL Only)

A

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

43
Q

Short run J curve

A
  • 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
44
Q

Long run J curve

A
  • Demand for M and X are elastic
  • Foreigners buy export –> revenue rise
  • Consumer find subs for imports –> revenue fall
  • Current account improve
45
Q

Inverse J curve

A

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

Economics (Vicky) REAL one (21 decks)

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