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.