Balance of Payments

Question 1

What are the three accounts in BOP?

Answer 1

Current, Capital and Financial

Question 2

Give the formula for the current account? And alternative formula based on GDP?

Answer 2

X - M = Y - (C+I+G)

Question 3

What goes into the Capital account?

Answer 3

Capital transfers, non-produced and non-financial assets

Question 4

What goes into the financial account?

Answer 4

Portfolio Investment, Foreign Direct Investment

Question 5

What does a current account deficit indicate?

Answer 5

That the country imports more than it exports and borrows from foreign sources to finance this consumption.

Question 6

How do early expansions and contractions effect the housing sector and the trade balance?

Answer 6

Early expansions = increase in activity for housing sector / increases in trade balance deficit with more imports.
Contractions = reduced activity in housing sector, reduced deficit/increased surplus in trade balance due to less imports.