CH28 Balance of payments and the current account Flashcards
What is balance of payments?
The record of all transactions relation to international trade
What is the current account?
Part of the balance of payments where all exports and imports are recorded
What are exports?
Goods and services sold overseas
What are imports?
Goods and services being bought from overseas
What is a current account deficit?
When the value of imports outnumbers the ones of exports
What is a current account surplus
When the value of exports outnumbers the ones for imports
What is visible trade?
Buying and selling of physical goods
What is invisible trade?
Involves the exchange/trade of services
What is exchange rate?
Price of one currency compared to another
What does it mean when a exchange rate appreciates?
The currency gets stronger and more valuable
What does it mean when an exchange rate depreciates?
The currency gets weaker and is less valuable
What happens when the exchange rate depreciates?
Price for the Domestic good goes down
Demand for the domestic good increases
Which leads to a current account surplus
What happens when the exchange rate appreciates?
Price for the domestic good increases
Demand for the domestic good decreases
Which leads to a current account defecit
How is quality of domestic goods a reason for a Current account surplus/ defecit?
If a country has a good reputation for its goods, it’s likely to enjoy higher demand and sales from overseas buyers. This will lead to an increase in the current account balance.
How is quality of foreign goods a reason for a Current account surplus/ defecit?
if goods and services from overseas are seen as superior than to the ones produced domestically. Then demand for the foreign goods will increase for these imports, therefore this will lead to a decrease in the current account balance.
How is price of domestic goods a reason for a Current account surplus/ defecit?
If the domestic good is more expensive than a foreign good, then demand for the domestic good will fall. Leading to a decrease in the current account balance.
How is price of foreign goods a reason for a Current account surplus/ defecit?
If the foreign good is more expensive than the domestic good, demand for the domestic good would increase and the demand for the foreign good would decrease. Leading to an increase in the current account balance.
What is the impact of a current acccount defecit on inflation?
The greater reliance on imports, the greater the threat of inflation when import prices rise
What is the impact of a current account deficit on leakages from the economy?
A continuing current account deficit shows that a country relies heavily on imports. As a result, money goes out of the country, this represents output, and employment levels in the domestic economy are under threat.
What is the impact of a current acccount defecit on lower demands for exports?
A current account defecit may show weakness in the economy. This means that domestic firms may struggle as they are not competitive in certain industries
What is the impact of a current account defecit on exchange rate?
Results in a depreciation in exchange rate, making their currency less valuable
