Topic 2: Balance of Payments Flashcards
Define the balance of payments.
A statistical statement of all economic transactions between Australian residents and the rest of the world over a particular period of time.
What are the elements of the current account?
- Trade balance
- Net services
- Net income
- Current transfers
What are the elements of the financial account?
- Moosa ain’t carin’
How would an academic attending an overseas conference affect the BOP? What pressure on the exchange rate?
Net services part of the current account, a debit entry.
This would cause a depreciation of the academics home country currency.
What would the effect of a widespread drought be on the BOP? Pressure on the exchange rate?
Decreased exports for the home economy. Home consumers will be forced to import to meet previously locally supplied needs.
Thus a two debit entries to the trade element of the current account.
This will cause a depreciation.
What would the effect of a raise in interest rates be on the BOP, and the pressure on the home currency?
This would cause a flow of capital from foriegn countries to the home economy.
This is a debit entry in the capital and financial account.
As such, demand for the home currency will increase and it will appreciate, ceterus paribus.
Where does interest of foreign debt go in the BOP?
Net income
What is the balancing item? Is it steady year to year?
- An entry included to make sure the BOP is = 0.
- While there is some error in measuring the BOP accounts, analysis of the balancing item has shown it to be free from bias.
Does the CA balances over the world sum to zero? Why not?
Not necessarily, there is a tendancy for:
- Interest paid > Interest recieved (income not recorded for tax purposes)
- Foriegn aid given > Foriegn aid recieved (corruption)
