The Balance of Payments

Question 1

The Balance of Payments

Answer 1

Record of all transactions between residents of a country w/residents of all other countries, in a year

Question 2

Credits

Answer 2

payments entering from other countries (inflows)

Demand for a currency gives rise to credits (inflows)

Question 3

Debits

Answer 3

payments made to other countries (outflows)

Supply of a currency gives rise to debits (outflows)

Question 4

Balance of Payments consists of three accounts

Answer 4

Current Account

Capital Account

Financial account

Question 5

Current Account

Answer 5

A measure of the flow of funds from trade in goods & services, net investment income flows, & net transfers of money.

Question 6

Four components of the current account

Answer 6

1. Balance of trade in goods
   - A measure of the revenue received from the exports of goods minus the expenditure on the imports of goods, over a given period of time.
2. Balance of trade in services
   - A measure of the revenue received from the exports of services minus the expenditure on the imports of services over a given period of time.

• Non-tangible purchases such as tourism, banking, consulting, legal services, & flights

3. Income
   - Records the income receipts (inflows) earned from foreign investments minus the income payments (outflows) of factor incomes paid to foreign investors: wages, rent, interest, & profit
4. Current transfers
   - Records inflows & outflows of payments that are not made in exchange for anything

• Official transfers = payments from one govn’t to another govn’t, (i.e. foreign aid)
• Pensions: govn’t payment to retirees living abroad
• Private transfers = gifts + remittances

Question 7

Balance of trade in goods and services

Answer 7

The difference between a country’s total export earnings & its total import expenditures on goods & services

If net goods & services positive = BoT surplus

If net goods & services negative = BoT deficit

Question 8

Current account deficit

Answer 8

Exists if total spending by a country imports GREATER than income from exports

MOST SIGNIFICANT is BoT in goods & services:
- If value of imports greater than value of exports = current account deficit
- If value of exports greater than value of imports = current account surplus

Question 9

Capital account

Answer 9

A measure of the net change in foreign ownership of domestic financial assets

1. Capital transfers
   - When a foreign govn’t or private sector gives:
   (i) investment grants to purchase capital or directly donates capital goods
2. Debt forgiveness
   - Debt owed by a nation to another lending nation
   - If forgiven by lender:
   (+) credit to debtor nation
   (-) debit for lending nation
3. Non-produced, non-financial, & fixed assets

Inflows minus outflows of payments for purchases of:
- Natural resources: forestry, fishing, & mineral rights
- Intangible assets: cell network spectrum, patents, copyrights, trademarks, licenses, franchises

Question 10

Financial account

Answer 10

Records flow of money for purchase/sale of financial assets by a nation’s people & all other nations

1. Direct investment
   - Inflows minus outflows of funds used for investments in physical capital, factories & buildings
2. Portfolio investment
   - The purchase of financial investments to gain a financial return in the form of interest or dividends.
3. Reserve assets
   - Gold & foreign currency held by central bank to influence the value of country’s exchange rate