IPE WEEK 5 Flashcards
What is the Balance of Payments (BoP)?
Definition: The BoP, also known as the balance of international payments, is a statement of all transactions made between entities in one country and the rest of the world over a defined period, such as a quarter or a year.
What are the components of the Balance of Payments (BoP)?
Trade balance
Current account balance
Financial (capital) account balance
Foreign exchange reserves
Define Trade Balance and its implications.
Trade balance: Total export earnings minus payments for imports.
Positive number = trade surplus
Negative number = trade deficit
What does the Current Account Balance include?
Trade balance
Service receipts
Income receipts
Transfer receipts
Service payments
Income payments
Transfer payments
Describe the Financial (Capital) Account in the BoP.
Includes direct investment, portfolio investment, and loans/borrowing.
Direct investment: investment in machinery, plants, and at least 10% of a firm.
Portfolio investment: buying and selling shares or bonds.
Loans/Borrowing: borrowing is a plus, while repayment is a minus.
How does the balance of payments relate to changes in foreign reserves?
The overall balance of payment (BoP) will be reflected in changes in foreign reserves.
Foreign reserves consist of foreign currencies and other reserve assets, such as gold, held by monetary authorities.
What led to Zambia’s debt crisis?
Allocation of more money to debt servicing than crucial sectors like education, health, water, and sanitation combined.
Borrowing short-term loans to finance infrastructure projects.
Projects took longer than the repayment timeframe to return revenue and socioeconomic value.
Copper prices failing to reach estimated highs.
Covid-19 emergency.
The climate crisis.
What is an Exchange Rate?
Definition: The ‘price’ of one currency in terms of another currency. Fixed (set by government) or flating (change according to market)
What happens if the exchange rate is out of equilibrium?
Balance-of-payments surplus: Dollar reserves accumulate or currency strengthens.
Balance-of-payments deficit: Dollar reserves are sold or currency weakens.
What are the main components of macroeconomic policy?
Fiscal Policy: Government actions regarding taxes and spending to influence total demand in the economy.
Monetary Policy: Actions by monetary authorities to influence money supply or credit costs.
How do interest rates affect the supply and demand of foreign currencies?
When Rand is ‘too weak’ – the pressures are on the Reserve Bank to raise
interest rates.
* When Rand is seen to be ‘too strong’ – pressures are to reduce interest rates
Who are the winners and losers of interest rate changes?
Exporters: Like currency depreciation
Importers: Like appreciation
Producers: Like depreciation
