global economy 4.6 - Balance of payments

Question 1

define the balance of payments account

Answer 1

a record of the value of all the transactions between the residents of one country and the residents of all other countries in the world over a given period of time

Question 2

3 main parts of the balance of of payments account

Answer 2

• current account
• capital account
• financial account

Question 3

define the current account

Answer 3

a measure of the flow of funds from trade in goods and services, plus other income flows

Question 4

describe the 4 parts into which the current account is subdivided

Answer 4

Balance of trade in goods: measure of the revenue received from the exports of tangible goods minus the expenditure on the imports of tangible goods. Deficit = M>X
Balance of trade in services: revenue received from the exports of services minus the expenditure on the imports of services over a given period of time (eg banking, tourism)
Income: measure of the net monetary movement of profit, interest and dividends moving into and out of the country as a result of financial investment
Current transfers: payments made between countries when no goods or services change hands (eg aid, grants, sending money back to families = remittances)

Question 5

give the equation for current account balance

Answer 5

balance of trade in goods + balance of trade in services + net income flows + net transfers

Question 6

describe the 2 elements of the capital account

Answer 6

Capital transfers: measure of the net monetary movements gained or lost through actions such as the transfers of goods and financial assets by migrants entering or leaving the country, debt forgiveness, transfers relating to the sale of fixed assets, gift, inheritance taxes and death duties
Transaction in non-produced, non-financial
assets: net international sales and purchases of non-produced assets such as land or the rights of natural resources, and the net international sales and purchases of intangible assets, such as patents, copyrights, brand names or franchises.

Question 7

define the financial account

Answer 7

the net change in foreign ownership of domestic financial assets

Question 8

financial account surplus

Answer 8

if foreign ownership of domestic financial assets increases more quickly than domestic ownership of domestic financial assets

Question 9

three components of the financial account surplus

Answer 9

Foreign Direct Investment (FDI):
Inflows: Represents the capital invested by foreign entities in the domestic economy, such as acquiring ownership stakes in companies or establishing new ventures.
Outflows: Indicates the capital invested by domestic entities in foreign economies through activities like establishing subsidiaries or acquiring assets abroad.

Foreign Portfolio Investment (FPI):
Inflows: Encompasses investments in financial assets such as stocks, bonds, and other securities in the domestic economy by foreign investors.
Outflows: Refers to domestic investors’ holdings of foreign financial assets, including stocks and bonds in international markets.

Official Reserves:
Inflows: Consists of foreign exchange reserves acquired by the central bank, often through activities like currency interventions or trade surpluses.
Outflows: Represents the depletion of foreign exchange reserves, typically used to stabilize the domestic currency or fulfill international payment obligations.

Question 10

balance of payments equation

Answer 10

current account = capital account + financial account + net errors + omissions

Question 11

another

Answer 11

current account + capital account + financial account + balancing item = 0