Balance of Payments Flashcards
Define Debit
Cash Outflows
Define Credit
Cash Inflows
Balance of Trade
Value of Exported Good minus value of imported goods
Balance on Services
Value of Exported Services minus value of imported services
Net Foreign Investment Income (NFII)
profit, dividends and interest accruing to residents of country X due to investment abroad minus profits, dividends, and interest accruing to foreigners due to investment in country X.
Capital Account (CAP)
reflects payments arising from non-resident purchases of assets
purchases of foreign assets by a country’s residents create debits
purchases of domestic assets by foreigners creates credits
What are the characteristics of Short Term Capital Flows
highly liquid assets, valuables, sensitive to short - term interest rates
What are the characteristics of Long Term Capital Flows
more permanent investments i.e
direct investment - changes in non-resident ownership of domestic and firms
portfolio investment = minority holdings of shares
Overall Balance of Payments
BoP surplus = CUR + CAP > 0
BoP deficit = CUR + CAP < 0
Define Official International Reserves (OIR)
holdings of foreign currencies or, historically precious metals by central bank
very important in fixed xR system
Current Account (CUR)
reflect payments arising from trade in goods and services and income flows due to foreign investment
exports create credits
imports create debits
What are the adjustments to BoP in a fixed exchange rate?
fixed exchange rate = OIR changes
BoP surplus = gain OIR
Bop deficit = lose OIR
continual BoP deficits are unsustainable
What are the adjustments to BoP in a floating exchange rate?
lexible exchange rate system = exchange rate changes
in truly flexible system, OIR = 0
BoP surplus = currency gains value
BoP deficit = currency lose value
