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Subjects > ECONOMICS-BOP > Flashcards

ECONOMICS-BOP Flashcards

1
Q

Balance of payments is

A

A record of a country’s economic transactions with the rest of the world over a year.

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2
Q

Current account includes

A
  1. Trade in goods
  2. Trade in service
  3. Investment income
  4. Current transfers
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3
Q

Trade in goods balance is AKA

A

visible balance/ merchandise balance or balance of trade

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4
Q

Current account balance is

A

The sum of total credits and debits in current account.

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5
Q

The current account balance shows

A

How much a nation has spent on foreign goods, services, investment income payments, and transfers relative tho how much it has earned from other countries.

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6
Q

Balance of trade is

A

The difference between the export revenue of goods and services and import expenditure of goods and services.

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7
Q

Capital account is a record of

A

capital transfers and the acquisition and disposal of non-produced, non-financial assets. It is a relatively small part of the balance of payments

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8
Q

Capital account covers

A
  1. government debt forgiveness 债务减免
  2. !!!money brought into and taken out of the country by migrants
  3. the sales and purchases of copyrights, patents and trademarks
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9
Q

Financial account is a record of

A

The transfer of financial assets between the country and the rest of the world

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10
Q

Financial account includes

A
  1. Direct investment
  2. Portfolio investment
  3. Other investment
  4. Reserve assets
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11
Q

Direct investment covers

A
  1. The building of a factory and takeover of an existing firms in foreign country. (debit item)
  2. The setting up of a new plant and takeover of a firm in the country by a foreign firm. (credit item)
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12
Q

Portfolio investment covers

A
  1. The purchase of (foreign) bonds and shares that do not involve legal control of a firm. (debit items)
  2. The sale of (foreign) bonds and shares that do not involve legal control of a firm. (credit items)
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13
Q

Other investment covers

A

Shorter-term movements of financial investment including bank loans and inter-government loans, etc.

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14
Q

Reserve assets are

A

Mainly made up of the government’s holdings of foreign exchange reserves, gold, special drawing rights(特别提款权) and changes in country’s reserve position in the IMF

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15
Q

A current account deficit must be offset by

A

A capital and financial account surplus

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16
Q

If expenditure exceeds revenues, then the country needs to finance the additional expenditure:

A
  1. by borrowing from abroad/ selling assets to foreigners

2. by reducing official reserve assets

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17
Q

Causes of current account deficit

A
  1. trade deficit
  2. deficit on income and current transfer
  3. 1&2
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18
Q

Causes of trade deficit

A
  1. reduction in exports

2. increase in imports

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19
Q

Why exports fall and imports rise?

A
  1. Uncompetitive price
  2. Uncompetitive quality
  3. Temporary reduction in domestic supply (export fall)
  4. Cyclical falls in foreign income (export fall)
  5. Cyclical rises in domestic income (import rise)(growing economy)
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20
Q

Structural deficit of current account

A

Uncompetitiveness of goods and services

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21
Q

Cyclical deficit of current account

A
  1. Cyclical falls in foreign income

2. Cyclical rises in domestic income

22
Q

Might current account deficit be a problem?

A
  1. Structural deficit is a problem: not self-correcting.
  2. Cyclical deficit, growing domestic economy and temporary reduction of domestic supply are not problems: short-term and self-correcting.
23
Q

Why is current deficit caused by a growing economy not a problem?

A
  1. Attracts foreign investment - capital inflows offset capital outflows in current account.
  2. Self-correcting: more raw material more products sold.
24
Q

Capital & financial account deficit consists of

A
  1. Large capital outflow

2. Small capital inflow

25
Q

Might capital and financial account deficit be a problem?

A

No. Generating future inflow of profits, interest and dividends.
BUT it is a concern if it results from a long-term lack of confidence.

26
Q

Consequences of current account deficit

A
  1. Money supply (quantity of money) decreases
  2. Downward pressure (贬值压力) on the exchange rate
    - Fixed exchange rate: run out of foreign currency reserves
  3. Short run living standard improved
  4. Aggregate demand reduced
  5. Net holding of foreign assets falls (borrow from abroad)(rise in external debt)
27
Q

Should current account deficit be a concern?

Essay structure

A

Causes - affordability - size - continuity - effect on the economy

28
Q

Expenditure switching policy is

A

All consumers buy more domestic and less foreign

29
Q

Expenditure dampening policy is

A

Reduce the total level of spending (reduce AD)

30
Q

Fiscal policy

A
  1. Taxation

2. Government spending

31
Q

Monetary policy

A
  1. Exchange rate
  2. Interest rate
  3. Money supply
32
Q

Supply side policy

A
  1. Income tax reduction
  2. Education and training
  3. Restrict trade union power
  4. Privatization
  5. Deregulation
  6. Subsidies
  7. Remove trade barriers
  8. Increase competition
33
Q

Expenditure dampening policy & fiscal policy

A
  1. Raise income tax

2. Lower government spending

34
Q

Expenditure switching policy & fiscal policy

A

Imposition of tariffs and other trade barriers

35
Q

Drawbacks of raising income tax

A
  1. reduce incentives

2. contractionary/ deflationary fiscal policy: decrease AD, increase unemployment, slow down economic growth.

36
Q

How raising income tax works for dampening

A

consumers are left with lower disposable income

37
Q

How imposing tariffs works for expenditure switching

A

imported goods become more expensive

38
Q

Imposition of tariff works well when

A

High quality, domestically produced substitutes are available
Domestic consumers have elastic demand for imported goods
The country is not imposing tariffs against fellow members of a trade bloc, in which tariff is not an option.

39
Q

Any drawbacks of imposition of tariff?

A
  1. Impedes specialization and benefits of free trade
  2. Reduces pressure on domestic firms to compete
  3. Provokes retaliation
40
Q

Are non-tariff barriers expenditure switching policies?

A

YES.

e.g. quotas, exchange control, export subsidies……

41
Q

Factors determining whether a quota is an effective measure to reduce import expenditure:

A
  1. the level at which the quota is set
  2. the elasticity of domestic demand for foreign products
  3. may provoke retaliation
42
Q

How lower government spending works for dampening

A

directly reduce aggregate demand for goods & services
👉lower expenditure on imports and domestic goods
(contractionary/ deflationary fiscal policy)
🔥multiplier effect makes the reduction of AD bigger

43
Q

If fiscal policies (switching and dampening) are stopped, will consumers increase spending on imported goods again?

A

Yes.

  1. Short-term, not long term.
  2. Contractionary slows down economic growth and increases unemployment.
  3. Time lags: takes time to work.
  4. Ineffective to reduce income and current transfer deficit.
44
Q

Expenditure switching policy

A
  1. imposition of tariffs
  2. imposition of other trade barriers
  3. devalue exchange rate
  4. lower interest rate
  5. increase growth of money supply
45
Q

Expenditure dampening policy

A
  1. raise income tax (con fis)
  2. lower government spending (con fis)
  3. raise interest rate (de mon)
  4. reduce growth of money supply (de mon)
46
Q

Supply side policy is

A

a general term to refer to a number of different actions that a government could take which enable markets to work efficiently and to boost the productive potential of an economy

47
Q

How does supply side policy correct BOP disequilibrium

A

Supply side policy may reduce a current account deficit and a financial account deficit.

48
Q

How does supply side policy MAKE DOMESTIC PRODUCTS MORE COMPETITIVE

A
  1. more skilled labor force and better equipment
  2. more competitive pressure on domestic firms
  3. more responsive of firms to changes in consumer demand
    👉low price and high quality domestic products
49
Q

How does supply side policy MAKE DOMESTIC MARKET MORE ATTRACTIVE TO INVEST IN

A
  1. better worker and equipment
  2. less action of trade union
  3. economic prospects brings more portfolio
50
Q

Drawbacks of supply side policy

A
  1. reduction in income tax: work fewer hours
  2. improved education: long time
  3. privatization: inefficiency if monopoly
  4. government subsidies: domestic complacent and foreign retaliation

Subjects (12 decks)

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