Chapter 11 Flashcards
Balance of payments
A summary record of transactions between residents of a country and residents of other countries
Data on international transactions place a crucial role in economic policymaking..
- central banks use information on international transactions in the formulation of monetary policy
- provide valuable information on activities of mncs –> gives insight into a country’s international competitiveness
- policymakers are better equipped to asses the performance of the overall global economy and compare economic performance across countries
Main types of transactions
1- those involving production and sale of goods, services, and income transfers
2- those involving financial assets and liabilities
3- (small) those involving non produced non financial assets
Current account of the balance of payments
The first category of international transactions-those involving production and sale of goods, services, income, and unilateral transfers
- Transactions in goods (visibles)
- Transactions in services (invisibles)
- tourism
- transport
- insurance
- communication
- software’s, apps
•Transactions in income (Primary income)
-income from industrial property ( brands, patents
royalties, intellectual property rights)
-income from work (salaries for working to a
foreign company.
-income from investment (interest on foreign
loans, dividends, renting buildings)
•Unilateral transfers (Secondary income)
Capital/financial account of the balance of payments
The second and third category of international transactions
2- those involving financial assets and liabilities
3- (small) those involving non produced non financial assets
Financial account
•Direct investment: buying/opening a factory (or a %)
•Portfolio investment: Ex. stock, bonds, certificates of
deposits
•Other investment: debts instruments
Capital account
- Non financial assets: acquisition/sale of land,
mineral deposits (fixed assets).
A credit entry in the US balance of payments accounts
When a transaction leads to a payment to a US resident, company or government by a foreign resident (+)
Credit entries
Flow of money into the country (+)
A debit entry in the US balance of payments accounts
When a transaction involves a payment to a foreign resident by a US resident, business or government (-)
Debit entries
Flow of money out of the country (-)
The balance of payments identity
The sum of all credit and debit entries =0
–> The sum of the balances of the current account and the capital/financial account = 0
Transactions in income (current account)
Mainly comprise of returns for the use of capital. (interest from holdings or financial assets such as bonds, dividends and reinvested profits)
Unilateral transfers
Essentially gifts or donations of goods and services.
These include government donations of goods and services to countries experiencing natural and(or man-made disasters
Non-quid pro quo transfers
Also include private transfers
Non-quid pro quo transfers
The recipient of the transfer does not make or promise to make any payment for the goods or services received
The capital/financial account
International transactions involving capital flows- sales and purchases of financial assets (shares of stocks, bonds, bills, and certificates of deposits)
Official Reserve Assets and Other Official (non-reserve) Assets (cap/fin account)
Transactions involving governments or agencies of governments like central banks.
US reserve assets include monetary gold, special drawing rights (SDRs), the country’s reserve position at the IMF, and foreign currencies.
SDR
Virtual currency used by the IMF and convertible to most major currencies
If the Federal Reserve wants to reduce the value of the US dollar..
Sell US dollars in exchange for foreign currencies
If the Federal Reserve wants to raise the value of the US dollar..
Purchase of US dollars using foreign currency reserves
Non produced, non financial assets (capital/financial account)
- acquisition or disposal of right to tangible assets- right to mineral deposits/ offshore drilling rights
- sales and purchases of trademarks and copyrights
- insured losses and debt forgiveness
Statistical discrepancy
A balancing item in the balance of payments- inserted to ensure the perfect balance between credits and debits
Trade deficit
Negative trade balance (exports + imports)
Trade surplus
Positive trade balance
Balance on income
Difference between income receipts and income payments
Net unilateral transfers
Difference between received and given donations
Balance on current account
The sum of the balance on goods and services, the balance on income and the net unilateral transfers
- the sum of all credit and debit entries in the current account
Balance of payments deficit
The sum of credit and debit entries in the current, capital/financial (excluding official transactions) accounts, and the statistical discrepancy is negative
Implies a net credit (+) balance on official transactions–> a decrease in US official reserves
Spend more abroad than earned from abroad
Balance of payments surplus
Spend less abroad than earned from abroad
Net debit (-) balance on official transactions- Increase in US official reserves
Balance of payments equilibriums
The sum of credit and debit entries in the current, capital/financial (excluding official transactions) accounts, and the statistical discrepancy = 0
Spent just as much as earned abroad
