Chapter 5 Flashcards
What is the name of the accounts that record a country’s international transactions?
Balance of Payments accounts
What are the three main components of the Balance of Payments accounts?
Current Account, Capital Account, and Financial Account
What is the difference between a credit item and a debit item in the Balance of Payments accounts?
A credit item involves a flow of funds into the country, while a debit item involves a flow of funds out of the country.
What are the three subcomponents of the Current Account?
Net exports of goods and services (NX), net income from abroad (NFP), and net unilateral transfers (NUT)
What is the formula for calculating net exports of goods and services (NX)?
NX = exports - imports
What are some examples of services that are included in net exports of goods and services (NX)?
Services include tourism, insurance, and education.
What is the formula for calculating net income from abroad (NFP)?
NFP = net income receipts from abroad - income payments to residents of other countries
What are some examples of income that are included in net income from abroad (NFP)?
Income includes workers income and investment income.
What are some examples of transfers that are included in net unilateral transfers (NUT)?
Transfers include official foreign aid and remittances.
What is the formula for calculating net unilateral transfers (NUT)?
NUT = transfers received - transfers flowing out of the country
What is the difference between a small open economy and a large open economy?
A small open economy is one that takes the world interest rate as given, while a large open economy is one that can affect the world interest rate through its saving and investment decisions.
What is the relationship between the current account and the financial account in the balance of payments accounts?
The current account and the financial account must add up to zero, meaning that any surplus or deficit in one account must be matched by an equal but opposite surplus or deficit in the other account.
What is the difference between an open economy and a closed economy in terms of saving and investment?
In an open economy, saving and investment do not have to be equal, while in a closed economy, saving and investment must be equal.
What does it mean when saving is greater than investment in an open economy?
It means that the economy will lend to the international market, or have a current account surplus.
What does it mean when saving is less than investment in an open economy?
It means that the economy will borrow from the international market, or have a current account deficit.
Financial Account involves
Purchase or sale of
assets
e.g (money, stocks, factories, government debt)
Capital account involves
Special kind of assets
(debt forgiveness, copyrights and trademarks)
What is the name of the account that records the purchase or sale of assets in the Balance of Payments accounts?
Financial Account
What is the difference between a financial inflow and a financial outflow?
A financial inflow is when a foreign firm buys domestic assets, while a financial outflow is when a domestic firm buys foreign assets.
What does it mean when a country has a financial account surplus?
It means that foreign inflows are greater than foreign outflows, or that the country is a net seller of assets.
What does it mean when a country has a financial account deficit?
It means that foreign inflows are less than foreign outflows, or that the country is a net buyer of assets.
What does it mean when a country increases its official reserve assets during a year?
It means that the country has a balance of payments surplus, or that it is lending more to the rest of the world than it is borrowing.
What is the relationship between the net increase in a country’s official reserves and the balance of payments?
The net increase in a country’s official reserves is equal to the balance of payments.
What are the official reserve assets that are used by central banks?
Foreign exchange reserves
What does it mean when a country reduces its holding of official reserve assets during a year?
It means that the country has a balance of payments deficit, or that it is borrowing more from the rest of the world than it is lending.
What is the relationship between the current account and the financial account in the balance of payments accounts?
The current account and the financial account must add up to zero, meaning that any surplus or deficit in one account must be matched by an equal but opposite surplus or deficit in the other account.
What does a current account surplus imply for the financial account and the net foreign assets?
A current account surplus implies a financial account deficit and a net acquisition (accumulation) of foreign assets, or a net foreign lending.
What does a current account deficit imply for the financial account and the net foreign assets?
A current account deficit implies a financial account surplus and a net sale of foreign assets, or a net foreign borrowing.
Under what condition does a current account surplus or deficit equal to net exports?
A current account surplus or deficit equals to net exports when net income from abroad and net unilateral transfers are both zero.
