The Balance of Payments Flashcards
definition of BOP
a record/summary of all economic transactions that occur between domestic entities and foreign entities
(entities: households, firms, and government)
period of BOP measurement
annually
different accounts of the BOP
current account income account capital account financial account net errors and omissions
credit
positive entry
exports of goods and services, income receivable, increase in foreign liabilities and export of currency
debit
negative entry
imports of goods and services, income payable, increase in foreign assets, import of currency
the current account
includes all transactions which have an immediate effect on the economy and GDP. Contains other accounts…
the goods account
the services account
income account
the goods account
all transactions involving psychical goods
the net merchandise trade
the balance of the goods account minus the balance of the services account
the services account
all transactions involving services
income account
records all income earnt (interest, dividends, wages, profits and salary’s)
income earnt = credit
income paid = debit
primary income
associated with foreign investment flows
compensation of labor
investment income
secondary income
transactions where financial or real resources are provide without anything in return (foreign aid, gifts, donations)
current account balance
surplus: more money was injected than was spent overseas by residents
deficit: more money leaked overseas than was injected into the economy
Australia’s historical current account balance
Australia’s normally records a CAD
but has shifted into a CAS as of June 2019
capital and financial account
records all the physical capital and financial transactions
capital transfers
part of the capital account
an account that records all capital transactions
non-produced non-financial assets
part of the capital account
an account that records any transactions of non-produced, non-financial assets (copyrights and patents)
the financial account
records all transactions associated with changes of ownership of a countries foreign financial assets and liabilities. (shares, loans, bonds)
include foreign investment in a country
financial account surplus
AIA < FIA = surplus
foreign investment into Australia’s is larger than Australian investment aboard
Australia’s relies on foreign investment
financial account deficit
AIA > FIA = deficit
Australia’s investment abroad is larger than foreign investment into Australia
Australia sharing funds with the rest of the world
direct investment
> 10% equity
portfolio investment
equity and debt securities
<10%
reserve assets
monetary gold and FOREX
net errors and omissions
an additional account to ensure that the BOP always balances.
impacts on the CAB
changes in.... economic growth unemployment inflation terms of trade FOREX
BOP effects
GDP (X +M + G + [X - M
Cyclical VS. Structural
cyclical factors: temporary and subject to frequent change (linked to the trade balance)
structural factors: more premiant and take time to change (linked to primary income)
cyclical factors
domestic business cycle world business cycle exchange rate commodity prices terms of trade
structural factors
investment savings gap
foreign investment
foreign debt
SI stances
S > I = CAS
S < I = CAD
