Balance of Payments Flashcards
What are the measures to reduce a current account deficit?
- Protectionist policy
- Supply side policies
- Policies to weaken exchange rate
What are the components of the current account? Please describe
Trade in Goods: Exports and imports of physical goods.
Trade in Services: Transactions involving services like tourism, financial, and consulting services.
Income: Earnings from foreign investments and payments to foreign investors.
Transfers: Unilateral transfers, such as foreign aid or remittances from workers abroad.
What are the components of the financial and capital account? Please describe
Capital Account: Records capital transfers, such as the sale of non-produced, non-financial assets.
Financial Account: Tracks financial assets and liabilities, such as foreign direct investment (FDI), portfolio investment, and changes in reserves.
define current account
The part of the Balance of Payment. It measures in the trade of goods and services, investment income and current transfers.
What are the causes of Deficits
aim for 3
Trade Imbalances: When a country imports more goods and services than it exports.
Income Imbalances: When a country’s earnings from foreign investments are lower than the payments it makes to foreign investors.
Low Savings Rate: Insufficient national savings can lead to deficits as the country relies on foreign financing.
What are the causes for surplus
aim for 3
Trade Surpluses: When a country exports more than it imports.
High Savings Rate: A nation with a high savings rate can accumulate surpluses as it invests abroad.
Foreign Investment Inflows: Attracting FDI and portfolio investment can lead to surpluses.
Measures to reduce current account deficit
Policies to weaken exchange rates: A depreciating currency can make exports cheaper and imports more expensive, improving the trade balance.
Fiscal Policy: Governments can reduce budget deficits to increase national savings and reduce reliance on foreign borrowing.
Protectionist policy: Reducing imports through tariffs, quotas to encourage more domestic production
Supply side policies: subsidies encouraging innovation and productivity improvements can enhance competitiveness in global markets.
What is the significance of global trade imbalances?
Economic instability: Persistent imbalances can lead to countries accumulate unsustainable levels of debt.
Exchange Rate: Imbalances can contribute to currency fluctuations, affecting trade and investment. (more imports lead to more supply)
Impact on AD: Imbalances in one country can affect the overall health of the global economy.
