Macroeconomics 2.5 Balance of Payments Flashcards
What is the balance of payments?
An attempt to measure all the currency flows into and out of the economy over a period of time.
What are the components of the current account?
- Trade in goods
- Trade in services
- Primary income
- Secondary income
What does a current account surplus indicate?
More money comes into the economy than goes out.
What does a current account deficit indicate?
More money goes out of the economy than comes in.
What is an export?
A good or service sold to another country.
What is an import?
A good or service purchased from another country.
What is a transaction?
An exchange of goods, services, or money.
What is a transfer?
A movement of money without an exchange of goods or services.
What are remittances?
Money sent by workers to their home countries.
Why do countries trade?
To benefit from comparative advantage and increase overall production.
What is primary income?
The balance between money sent abroad in profit and returns on investment and money received by domestic firms and investors.
What is secondary income?
Transfers of charity, aid, and remittances.
What does the financial account show?
Transactions associated with changes in ownership of assets and liabilities.
What are the four elements of the financial account?
- Foreign direct investment
- Portfolio investment
- Purchases or sales of financial assets
- Reserve assets
What is the capital account?
Reflects the transfer of non-produced non- financial and fixed assets and is small as a proportion of the Balance of Payments.
What can a positive balance on the current account indicate?
A favorable trade situation with more inflows than outflows.
What can a negative balance on the current account indicate?
A trade deficit with more outflows than inflows.
True or False: The balance of payments only includes the current account.
False.
What is the policy objective of a sustainable balance of payments position?
To maintain a trade balance that supports economic stability.
What are two possible causes of an imbalance on the balance of payments?
- Changes in consumer preferences
- Economic downturns affecting exports
Fill in the blank: The balance of payments should theoretically equal _______.
0
What are the implications of foreign purchases of UK businesses in the short term?
Increased capital inflow, impacting the financial account positively.
What are the implications of foreign ownership of assets in the long term?
Potential outflows of profits and dividends to foreign owners.
What is the impact of a trade deficit?
It can be damaging but depends on various factors.
What is one way a government can correct balance of payment current account imbalances?
Increase exports and reduce imports.
What is a government bond?
A debt security issued by a government to support spending.
What is a financial asset?
An asset that derives value from a contractual claim.
What is the balance of trade?
The difference between exports and imports of goods.
True or False: The balance of payments includes only transactions with the EU.
False.
What should be done if the current account is in a prolonged deficit?
Implement policies to encourage exports and reduce imports.
What is the significance of the balance of payments?
It reflects the economic transactions and financial health of a country.
