Chapter 3 Flashcards
It’s the statistical record of a country’s international transactions over a certain period oftime presented in the form of double-entry bookkeeping.
Balance of payments.
What can the Balance of payments be used about?
- Providing detailed information about the demand and supply of a country
- A country’s balance-of-payment data may signal its potential as a business partner for the rest of the world.
- Balance-of-payments data can be used to evaluate the performance of the coun- try in international economic competition.
Examples of international transactions.
- Import and export of goods and services
- Cross-border investments in businesses, bank accounts, bonds, stocks, and real estate.
Since the balance of payments is recorded over a certain period of time (i.e., a quarter or a year), it has the same time dimension as…
The National income accounting.
Any transaction that results in a receipt from foreigners will be recorded as a…
Credit, with a positive sign.
These entries arise from purchases of foreign goods and services, goodwill, financial claims, and real assets.
Debits.
A country’s international transactions can be grouped into the following three main types:
- The current account.
- The capital account.
- The official reserve account.
It includes the export and import of goods and services.
The current account.
It includes all purchases and sales of assets such as stocks, bonds, bank accounts, real estate, and businesses.
The capital account.
It covers all purchases and sales of international reserve assets such as·dollars, foreign exchanges, gold, and special drawing rights (SDRs).
The official reserve account.
It represents a reduction in the country’s net foreign wealth.
A current account deficit.
A country with a current account surplus acquires IOUs from foreigners, thereby increasing its…
Net foreign wealth.
The current account is divided into four finer categories:
- Merchandise trade
- Services
- Factor income, and
- Unilateral transfers.
It represents exports and imports of tangible goods, such as oil, wheat, clothes, automobiles, computers, and so on.
Merchandise trade.
It represents the net merchandise export.
The trade balance.
The second category of the current account, include payments and receipts for legal, consulting, and engineering services, royalties for patents and intellectual properties, insurance premiums, shipping fees, and tourist expenditures.
Services.
These trades in services are sometimes called…
Invisible trade.
The third category of the current account, consists largely of payments and receipts of interest, dividends, and other income on foreign investments that were previously made.
Factor income.
The fourth category of the current account, involve “unrequited” payments.
Unilateral transfers.
Examples of unilateral transfers.
Examples include foreign aid, reparations, official and private grants, and gifts. Unlike other accounts in the balance ofpayments, unilateral transfers have only one-directional flows, without offsetting flows.
Examples of factor income.
If U.S. investors receive interest on their holdings of foreign bonds, for instance, it will be recorded as a credit in the balance of payments. On the other hand, interest payments by U.S. borrowers to foreign creditors will be recorded as debits.
Examples of services/invisible trade.
For example, X-ray pictures taken at a local hospital in the United States may be transmitted overnight via the Internet to an IT outsourcing center in India. Then, doctors there would examine the digital images and data and e-mail their diagnosis back to the U.S. hospital for a fee. In this case, the U.S. effectively imported medical service from India.
What happens when a country’s currency depreciates against the currencies of major trading partners?
The country’s exports tend to rise and imports fall, improving the trade balance.
Explain the J-curve effect.
Following a depreciation, the trade balance may at first deteriorate for a while. Eventually, however, the trade balance will tend to improve over time.
