balance of payments Flashcards
balance of payments definition
record of all transactions between one country with all other countries, consisting of payments entering the country from abroad and payments leaving the country
what is the current account a sum of
capital account
financial account
errors and omissions
what does current account always equal to
0
importance of current account
shares the highest proportion in the current account so most likely determines the current account balance
4 components of current account
- balance of trade in goods
- balance of trade in services
- income
- current transfers
2 components in capital account
- capital transfers
- transaction of non-produced, non-financial assets
4 components of financial account
- direct investment
- portfolio investment
- reserved assets
- official borrowing
what does demand for a currency give rise to
credits
what does supply for a currency give rise to
debits
what does surplus in the current account mean in terms of financial account
deficit in financial account
how does a country pay off current account deficit [4]
- selling physical assets
- selling financial assets
- selling foreign currencies to buy domestic currency
- borrow money from abroad
how does selling physical assets affect current account deficit
credit increases
- use gains from selling physical assets to pay off the current account deficit
how does selling financial assets help current account deficit
credit increases
- use the gains from selling physical assets to pay off the current account deficit
how does selling foreign currencies to buy domestic currency affect current account deficit
credit increases
- creates an inflow of domestic currency
how does borrowing money from abroad help current account deficit
credit increases
- use the foreign loan to pay off the current account deficit
deficit effect on exchange rate + elaborate (loop when determined by market forces)
depreciation
- makes exports more competitive → reduce current account deficit
- currency will appreciate again → exports will be less competitive which reduces current account surplus
how does expansionary fiscal policy affect current account surplus
debit increases
- government spending increases and tax decreases → AD increases → disposable income increases
= increase imports in general
how does expansionary monetary policy help with current account surplus
debit increases
- interest rate decreases → consumption and interest increases → AD increases → disposable increases
= increase imports in general
how does reducing trade barrier help with current account surplus
eg. tariffs, quotas, subsidy
debit increases → import increases
how does supply-side policies help with current account surplus
debit increases
- if the effect of potential output increases → Y increases
= imports increases
- exports may increase too when inflationary pressure decreases
how does buying domestic currency using foreign reserves affect current account surplus
debit increases
- currency will appreciate
financial credit increases
cheaper to buy imports
= increase imports
cons of using expansionary monetary policies
- AD increase → inflation + inflationary gap increases
- interest rate decrease → currency for demand decreases (depreciation) → exports increase, imports decrease → cost-push inflation (SRAS decrease)
cons of reducing trade barriers
may increase dumping- bad for local industries
balance of trade in goods
value of exports in goods minus value of imports in goods
