Fact Sheet: Open economy accounting

Question 1

Balance of payments accounts

Answer 1

Records transactions of goods and financial flows between the home country and other countries.

Divided into the current and capital account.

Question 2

Current and Capital accounts

verbal

Answer 2

Current account:
Trade balance + Net interest and profits.

Capital and Financial account:
Changes in the stocks of foreign assets owned by home residents, home assets owned by foreign residents and the central bank’s forex reserves.

Question 3

Current and Capital account equations

Answer 3

BP =
((X - M) + net interest receipts) + (private net capital flows - change in forex reserves)

Sums to ZERO.

Question 4

Why should the BoP = 0?

Answer 4

Because every credit appearing in the current account has a corresponding debit in the capital account and vice versa.

If a country exports an item, it effectively imports foreign capital when that item is paid for

Question 5

Floating vs Fixed Exchange rates

Answer 5

Floating regimes involve no intervention to buy or sell currencies.

A fixed exchange rate regime involves the commitment to buy/sell currencies to keep the nominal rate e constant.