current account of the balance of payments chapter 27 Flashcards
dividend payments
a share of a firms profits paid to its shareholders
exchange rate
price of one currency in terms of another currency
balance of payments account
a record of a country’s economic transactions with the rest of the world over a year
capital account
within the balance of payments ,a record of the sale and purchase of copyrights, patents, trademarks, and money brought into the country by immigrants and taken out by emigrants
financial account
within the balance of payments, a record of the transfer of financial and capital assets between the country and the rest of the world
components of the current account of the balance of payments
trade in goods
trade in services
primary income
secondary income
components of the current account of the balance of payments: trade in goods
refers to the export and import of goods. exports give rise to credit items while imports give rise to debit items the trade in goods balance is the revenue earned from exports of goods minus expenditure on imports of goods. the trade in goods balance can also be called the visible balance and the merchandise balance. a trade in goods surplus arises when export revenue is greater than import expenditure
components of the current account of the balance of payments: trade in services
refers to the trade in exports and imports of services, which may be referred to as ‘invisibles’. A trade in services deficit occurs when revenue from the export of services is less than the expenditure on services bought from other countries
components of the current account of the balance of payments: primary income
includes income in the form of profits, interest and dividends earned on direct investment abroad and foreign earnings on investments in the country
components of the current account of the balance of payments: secondary income
includes payments made and receipts received for which there is no corresponding exchange of an actual good or service. they include government transfers such as payments to and receipts from international organisations and foreign aid. transfers by private individuals are also included in this part of the current account. one such transfer is workers’ remittances
workers’ remittances
this the transfer of money from people working in a foreign country
what does money coming into the country create
it creates credit items and is recorded with a positive sign
what does money going out of the country create
it gives rise to debit items and is recorded with a negative sign
what does the balance of payments account consist of
it consists of the current account, capital account and the financial account
current account balance
the current account balance is the overall balance of the trade in goods, trade in services, primary income and secondary income
what does a current account deficit mean
it means that the combined debit items on the four parts of the current account balance are greater than the combined credit items on the four parts
what does a current account surplus mean
it occurs when the credit items on the four parts are greater than the combined debit items
imbalance (in the current account of the balance of payments)
debit items in the current account not equaling credit items. there is usually an imbalance in the current accounts of individual countries
current account deficit (of the balance of payments)
the value of debit items on the current account exceeding the value of credit items.
current account surplus (of the balance of payments)
the value of credit items on the current account exceeding the value of debit items.
balance (in the current account of the balance of payments)
debit items on the current account equalling credit items.
balance (in the current account of the balance of payments)
debit items on the current account equaling credit items. the value of current account deficits are matched by current account surpluses
how is the balance of trade of goods calculated
calculated by subtracting the value of imports of imports of goods from the value of exports of goods
how is balance of trade in services calculated
deducts the value of imports from the value of exports
how is the balance of trade in goods and services (aka total trade balance)
calculated by adding the balance of trade in goods to the balance in services
how is the current account balance calculated
the balance of the primary account and the balance of the secondary income are added to the balance of trade in goods and services
how does a declining domestic economy cause a current account surplus
If an economy is experiencing a recession, demand for imports is likely to decline. Consumers will buy fewer goods and services and firms will buy fewer raw materials and capital goods as output will fall. Such a cause of a current account surplus will not be beneficial.
how can increasing economic activity in the country’s trading partners
If the countries’ trading partners are doing well, they are likely to buy more of the country’s exports. The country’s people who are working in these countries may earn higher wages, some of which they can send back to their relatives at home.
how can structural advantages cause a current account surplus
A country’s firms may be competitive for a number of reasons. These include good education and training and a high level of investment and innovation. Other reasons why a country may be successful in selling more goods and services to other countries than it buys from them include low inflation and a low exchange rate, These two factors may result in the country’s products being price competitive.
what is known as country living beyond its means
A current account deficit allows the residents of a country to consume more products than the country produces.
how can should a country finance a deficit
it can by attracting investment into the country or by borrowing. this will involve an outflow of money in the future in the form of investment income
impact of an increase in current account deficit
it may also reduce aggregate demand, which may slow down economic growth and may cause unemployment
what is having a current account surplus mean
because it involves a country earning more than it is spending. it also means that the country’s residents are not enjoying as high a standard of living as possible.
what can generate inflationary pressure
high level of demand, combined with additions to the money supply
why would a country change its policies
those countries experiencing current account deficits may also put pressure on the country to change its policies in order to reduce its surplus
how can the significance of the size of a current account deficit or surplus be assessed more efficiently
by considering it as a percentage of the country’s gross domestic product (output) rather than seeing it in monetary terms
how can a current account deficit be caused by a growing domestic economy
when firms are increasing their output, they may buy more raw materials and capital goods from abroad. as well as import expenditure increasing, export revenue may decline as a result of exports being diverted from the foreign to the domestic market.
why is a current account deficit caused by a growing domestic economy not likely to be a problem
it is likely to be a short term and to be self correcting. as the country’s firms use the imported raw materials and capital goods to produce more products, they are likely to sell more products both abroad and home. so, export revenue may rise to match the higher import expenditure
how can a declining economic activity in a country’s trading partners cause a current account deficit
if the countries that buy this country’s imports experience recessions or slowdowns in economic growth, their import expenditure may fall or rise more slowly. A current account deficit that arises from either change in the economic cycle of the domestic economy or the economies of trading partners is sometimes referred to as a cyclical deficit.
why is a current account deficit caused by a declining economic activity in a country’s trading partners not likely to be a problem
it is likely to be relatively short term and self correcting
how can a current account deficit be caused by structural problems
low labour and capital productivity result in a lack of international competitiveness. These, in turn, may result from poor quality education and training and a low level of investment and innovation.
why is a current account deficit that lasts in the long run a problem
This is because it indicates that domestic firms are not internationally competitive and that the country may have to borrow to finance the surplus spending.
reasons for lack of of international competitiveness
an overvalued exchange rate maintained by government intervention and a relatively high inflation rate. Low labour and capital productivity also result in a lack of international competitiveness
why can current account deficit caused by structural problems a concern
it is a not self correcting
