Chapter 11 - international economics

Question 1

current account definition

Answer 1

records trade in goods and services and income earned or paid out on international investments

Question 2

what does the current account record

Answer 2

trade in goods
trade in services
income from employment overseas

Question 3

how are current account transactions recorded

Answer 3

–> imports are a cost to the economy, so are recorded as debits (fall in foreign currency in local banks)

–> exports create income for an economy and are recorded as a credit (rise in foreign currency reserves in local banks)

Question 4

difference between ca suplus/deficit and balance of trade

Answer 4

balance of trade is goods and services ONLY

Question 5

what is the capital account

Answer 5

records public sector flows of capital into and out of a country

eg government loans to other countries

Question 6

what is capital account made up of

Answer 6

public sector flows of capital into and out of the country eg government loans to other countries

Question 7

what is financial account

Answer 7

records flows of capital to and from the non government sector

eg direct investment into overseas facilities, portfolio investment (shares, bonds) and speculative flows of currencies

movements on government foreign currency also here

Question 8

how are financial account transactions recorded

Answer 8

credit entries = increase in foreign currency liabilities or fall in currency assets

debit entries = increase in foreign currency assets or fall in liabilities

Question 9

how can a government prevent an exchange rate to fall further after its original fall

Answer 9

buying own currency using foreign currency reserve

Question 10

benefit of having a floating exchange rate compared to a fixed exchange rate

Answer 10

The government will not have to deflate the economy when balance of payments current account deficits occur