The Balance of Payments and Terms of Trade Flashcards
What does a debit entry represent?
A negative entry reflecting imports of goods and services, or currency increase in foreign assets
Includes outflows like income payable.
What does a credit entry represent?
A positive entry reflecting exports of goods and services, or currency increase in foreign liabilities
Includes inflows like income receivable.
What does the capital and financial account record?
Net transfers and acquisitions, and net changes in assets and liabilities
Classified by investment type: direct, portfolio, and other.
What are net capital transfers?
Funds such as migrant funds and aid funds
Part of the capital and financial account.
What is the definition of a trade deficit?
The sum of the current account and the capital & financial account is negative
Occurs when imports exceed exports.
What is the definition of a trade surplus?
The sum of the current account and the capital & financial account is positive
Occurs when exports exceed imports.
What does the double entry system explain?
For every transaction, there must be two entries, one positive (credit) and one negative (debit)
If one account is in surplus, the other must be in deficit.
What is the balance of payments?
A systematic record of all transactions between the residents of one country and the rest of the world
Should always equal 0.
What are the three categories of the current account?
- Goods
- Services
- Primary income
Includes secondary income like foreign aid.
What is the current account balance equal to?
The difference between a country’s savings and its investments (S - I)
Indicates surplus or deficit.
What is a favourable movement in terms of trade?
A rise in the terms of trade where XPI > MPI
Indicates that a country receives more for its exports.
What can cause a favourable movement in the terms of trade?
- Export price index rises faster than import price index
- Export price index falls slower than import price index
What are positive effects of a favourable movement in terms of trade?
- Increased national income
- Increased living standards
- Increased government tax revenue
- Increased employment
- Increased investment
- Increased aggregate demand
What are negative effects of a favourable movement in terms of trade?
- Appreciation of AUD
- Increased inflation rates
What is an unfavourable movement in terms of trade?
A fall in the terms of trade where MPI > XPI
Indicates that a country receives less for its exports.
What can cause an unfavourable movement in the terms of trade?
- Export price index falls faster than import price index
- Export price index rises slower than import price index
What are positive effects of an unfavourable movement in terms of trade?
- Depreciation of AUD
- Decreased inflation rates
What are negative effects of an unfavourable movement in terms of trade?
- Decreased national income
- Decreased living standards
- Decreased employment
- Decreased investment
- Decreased aggregate demand
What does an increase in the terms of trade indicate for economic growth?
Higher export prices and increased national income
Leads to more investment.
What is the formula for the terms of trade?
Export Price Index (XPI) / Import Price Index (MPI) x 100
What does an increase in the export price index lead to in terms of trade?
Increased terms of trade
Conversely, a decrease leads to decreased terms of trade.
What is the impact of an increased import price index on the trade balance?
Increased debits, decrease trade balance
Conversely, a decrease leads to increased trade balance.
