Economics - EXAM Flashcards
Describe the balance of payments and its components.
The balance of payments is a statistical statement of transactions between residents and nonresidents during a period. It includes the current account, capital, financial account, and official reserve settlements balance.
Define the capital account and its components.
The capital account includes capital transfers (transfers of physical assets or with the goal
to create physical assets) and debt forgiveness, as well as the acquisition/disposal of non-produced, nonfinancial assets (patents, licenses, etc.).
What is the financial account in the balance of payments?
The financial account includes transactions concerning assets (NFA), such as direct investment (inward and outward), portfolio investment, and other investments.
Describe the components of the balance of (BOP).
The components of the BOP include equity capital, reinvested earnings, portfolio investment, financial derivatives, official reserve assets, and other assets and liabilities.
What is the double-entry rule in the balance of payments?
The double entry rule in the BOP states that each transaction should enter into the balance of payments twice, with an increase in assets represented as a positive and an increase in liabilities as a negative.
How do errors and omissions occur in the balance of payments?
Errors and omissions in the BOP can occur due to transactions not being registered simultaneously on both sides, some transactions being estimated, and others not being registered at all.
Define Net Financial Account (NFA) in the context of the balance of payments.
The Net Financial Account (NFA) in the BOP
represents the difference between a country’s sales of assets to foreigners and its purchases of assets from foreigners.
What are the reasons for the existence of errors and omissions in the balance of payments?
The reasons for errors and omissions in the BOP include transactions not being registered simultaneously on both sides, some transactions being estimated, and others not being registered at all.
Describe the relationship between GDP, GNP, and GNI in the context of Poland.
GDP is greater than GNP, which is greater than GNI in Poland.
How does a positive value of N in the BOP identities indicate a trade surplus?
The Current Account measures the difference between foreign income and expenditure and domestic income and expenditure, including the net export balance (N), Net International Investment (NINV), and Net Receipts from Unilateral Transfers (NUT).
Define BOPM6 and its components.
BOPM6, or Balance of Payments Model 6, considers foreign capital (KA), Net Economic Outflows (NEO), Current Account (CA), Net Foreign Assets (NFA), and Official Reserve Transactions (ORS) in the balance of payments.
How is Gross Domestic Product (GDP) calculated?
GDP is calculated by summing up Consumption (C), Investment (I), Government Spending (G), and Net Exports (N), where Net Exports is the difference between exports and imports (N = X - IM).
Do Gross National Product (GNP) and Gross National Income (GNY) differ?
Yes, GNP is similar to GDP but includes Net Investment from abroad (NINV), while GNY adds Net Unilateral Transfers (NUT) to GNP.
Describe the equation expressing Gross National Income (GNY) as the sum of Consumption, Investment, Government Spending, and the Current Account (CA).
The equation GNY = C + I + G + CA expresses Gross National Income as the sum of Consumption, Investment, Government Spending, and the Current Account, which includes the net balance of trade, net income from abroad, and net unilateral transfers.
Describe the Twin Deficit Hypothesis.
The Twin Deficit Hypo refers to the observed correlation between a country’s fiscal deficit and its current account deficit, suggesting a
relationship between the two.
Define Deficit.
The fiscal deficit occurs when a government’s total expenditures exceed the revenue that it generates, excluding money from borrowings, essentially representing the shortfall between the government’s spending and its income.
Explain the relationship between government spending and the trade balance according to the Twin Deficit Hypothesis.
An increase in government spending (fiscal deficit) can boost domestic demand, leading to higher imports and potentially widening the current account deficit.
How does borrowing to finance a fiscal deficit contribute to the current account deficit according to the Twin Deficit Hypothesis?
Borrowing to finance a fiscal deficit, especially from foreign sources, can lead to increased capital inflows, contributing to a current account deficit.
Describe the implication of higher interest rates on the current account deficit according to the Twin Deficit Hypothesis.
Higher interest rates resulting from heavy government borrowing to finance its fiscal deficit can attract foreign capital seeking better returns, contributing to capital inflows and, consequently, a current account deficit.
Describe the absorption approach to Balance of Payments (BOP).
The absorption approach to BOP focuses on the total spending by domestic residents within an economy, encompassing consumption, investment, and government spending.
Define the formula A = C + I + G in the context of the absorption approach to BOP.
The formula A = C + I + G represents the total absorption in an economy, where A is absorption, C is consumption, I is investment, and G is government spending.
How is GDP related to absorption and net exports in the absorption approach to BOP?
GDP is equal to the total absorption (A) plus net exports (N), where net exports represent the difference between exports and imports.
Do a relative decline in domestic spending compared to the overall economic output (GDP) favor an improvement in net exports in the absorption approach to BOP?
Yes, a relative decline in domestic spending compared to GDP can create conditions that favor an improvement in net exports and a more favorable trade balance.
Define exchange rate.
Exchange rate refers to the price of one currency in terms of another currency.
Describe how exchange rates are quoted in foreign exchange market.
Rates are quoted as foreign currency per unit of domestic currency or domestic currency per unit of foreign currency.
Define the foreign exchange market and its global daily turnover.
The foreign exchange market is a dispersed network with no central institution, and it has a global daily turnover of approximately 7.5 trillion USD, roughly 30 times the daily global GDP.
Do commercial banks and other depository institutions participate in the forex market? If so, how?
Yes, they engage in foreign exchange transactions to facilitate international trade and investment by buying/selling deposits in different currencies for investment purposes.
How do non-bank financial institutions participate in the foreign exchange market?
Non-bank financial institutions participate in the forex market for investment purposes by buying/selling foreign assets such as stocks, bonds, or other financial instruments denominated in foreign currencies to diversify their portfolios and potentially benefit from currency movements.
Describe the role of non-financial businesses in foreign currency transactions.
Non-financial businesses in foreign currency transactions as part of their international trade and investment activities, such as receiving payment in foreign currency for exports or buying/selling foreign currencies for investments.
Define the role of central banks in foreign exchange transactions.
Central banks manage a country’s monetary policy and engage in foreign exchange transactions as part of their official reserves management, intervening in the foreign exchange market to influence exchange rates or maintain currency stability.
List the transaction types on the forex market.
The transaction types on the forex market include spot transactions, outright forwards, FX swaps, currency swaps, and options and other products.
Explain the impact of currency depreciation on price competitiveness.
A depreciated currency is less valuable, meaning it can buy fewer foreign-produced goods denominated in foreign currency, affecting price competitiveness.
Describe the impact of a depreciated currency on imports and exports.
A depreciated currency means that imports become more expensive while domestically produced goods and exports become less expensive.
How is a general trend in price competitiveness measured in terms of exchange rates?
A general trend in price competitiveness can be measured using the nominal effective exchange rate, which is a trade-weighted average of changes in exchange rates.
Define the nominal effective exchange rate and its components.
The nominal effective exchange rate is a measure of the general movement (appreciation/depreciation) of a currency, calculated as a trade-weighted average of changes in exchange rates. It involves the number of competitor countries (N), the index of the exchange rate of the partner country (ei), and the overall trade weight assigned to the currency of the trading partner (wi).
Describe the nominal exchange rate.
The nominal exchange rate is the rate at which one currency can be exchanged for another, representing the relative value of the two currencies in the foreign exchange market.
Define the real exchange rate.
The real exchange rate is the nominal exchange rate corrected by price levels, taking into account the domestic and foreign price levels.
How is the real exchange rate related to purchasing power parities?
The real exchange rate is a basic concept to both absolute and relative purchasing power parities, as it reflects the relative purchasing power of two currencies.
Do the domestic and foreign price levels impact the real exchange rate?
Yes, the domestic and foreign price levels directly impact the real exchange rate, as it is calculated based on the nominal exchange rate and these price levels.
Describe the effective exchange weights for the EU from 1995-2021.
The effective exchange weights for the EU from 1995-2021 refer to the weighted average of bilateral exchange rates of the euro against the currencies of its main trading partners, reflecting the importance of each partner in EU trade.
Describe the real exchange rate and how differs from the nominal exchange rate.
The real exchange rate reflects the relative price levels of two countries’ currencies, considering inflation differences, while the nominal exchange rate is the rate at which one country’s currency can be exchanged for another’s, without considering changes in the price levels.
Define the real effective exchange rate (REER) and its significance in international trade.
The REER is a measure that assesses the value of a country’s currency in relation to a basket of other currencies, taking into account differences in price levels between the home country and its trading partners. It is essential for understanding a country’s international competitiveness in terms of trade.
How is the real exchange rate calculated and what does a value greater than 100 indicate?
The real exchange rate is calculated by multiplying the nominal exchange rate by the ratio of the domestic price level to the foreign price level, typically expressed as an index number. A value greater than 100 indicates that the domestic currency is overvalued compared to the foreign currency.
Do changes in the real exchange rate measure the price competitiveness of one country compared to another?
Yes, changes in the real exchange rate measure the price competitiveness of one country compared to another, taking into account inflation in both countries and changes in the nominal exchange rate.