W1 - Balance of payment crises Flashcards
What is external debt?
External debt is related to government borrowing
What are non-tradable goods?
Many services are non-tradable and hence remain local, for example a haircut in a local country. The type of services registered in international transactions are often assets or things such as education. Inevitably, exchange rates become increasingly relevant
How do countries finance the current account deficit?
To finance the current account deficit, countries will use foreign liabilities, this can lead to balance of payment crises
How can you find real GDP?
Real Y = Nominal Y/Price
How do real and nominal price levels differ?
Everyday transactions tend to be nominal prices, real variables account for price changes
What is the spot exchange rate?
Spot is the exchange rate at the time of the transaction
What is the forward exchange rate?
The forward exchange rate is something used by import exporters to do away with uncertainty. If you enter the transaction today, they specify a rate in 3 months, you enter a contract today for a guaranteed rate in the future in the specified maturity window. This is very important to import exporters as the goods do not arrive immediately so the transaction can happen now by the realisation of the goods actually happens a lot later
What is the carry trade?
Arbitrage
What does the balance of payments measure?
It registers transactions between the residents and non-residents of a country for a specific period. The balance of payments simply registers transactions and sums up the capital account, financial and current account
What can the balance of payments be broken down into?
- The Current Account
- The Capital Account
- The Financial account
How can the value of the current account be calculated?
Current Account = Trade balance + Primary Income + Secondary Income
What category of the balance of payments does income fall under?
Income is part of the current account. The current account does not just consist of trade
What are some examples of things included in the current account?
Merchandise trade; services trade; income from assets; unilateral transfers
What are the 4 components of the current account?
- Trade in goods
- Trade in services
- Investment income
- Transfers
What are the 4 components of the capital account?
- Debt forgiveness
- Inheritance tax
- Sales of both tangible and intangible assets
- Transfers of financial assets by migrants
(All international)
What are the three main components of the financial account?
- Portfolio investment transactions
- Foreign Direct investment flows
- Reserves
In the current account, are credits a positive or a negative?
Positive
In the current account, are debits a positive or a negative?
A negative, they are the imports
What appears as a positive in the financial account?
Net incurrence of liabilities
What appears as a negative in the financial account?
Net acquisition of assets
What does the capital account consist of?
The capital account is non produced non financial assets
Are imports a positive or negative on the current account?
A negative
Are exports a positive or negative on the current account?
A positive (a credit)
How are exports registered in the current account?
It is registered as a credit (positive entry) in the goods and services account
What does the double-entry system require?
The corresponding payment, be it in cash or credit transaction appears as a debit on the financial account (when exporting)
How are imports registered in the current account?
An import constitutes a debit (negative entry) on the goods and services account. Under double-entry, it has a corresponding credit on the financial account.
What is the primary income account?
The payments to factors of production, the returns to financial assets and the rent of natural resources
What is secondary income?
The redistribution of income by means of current transfers (aid for example)
Define the capital account?
Registers the acquisitions or disposal of non-financial and non-produced assets
How can the value of the financial account be calculated?
Current account + the capital account
What does a surplus mean in the financial account?
It means an increase in the country’s net indebtedness. If you accumulate debt this is registered as a positive in the financial account
How is debt accumulation measured in the financial account?
If you are accumulating debt, this is registered as a positive in the financial account, but if you are running down the deficit, this will be a negative in the financial account.
Define the financial account?
The financial account registers all transactions of financial assets and liabilities
What is direct investment?
More than 10% ownerships of shares
Define GDP
The main aggregate of national accounts. It measures all produced within a countries borders
Define GNI?
The value of all goods and services produced by factors of production resident in the country
What does the difference between GNI-GDP show?
Primary income. The difference between the two aggregates corresponds to the net payment of income to the factors used in production that are not residents in the country.
What does a negative primary income balance show?
It means that the country makes net income payments abroad and GDP is greater than GNI
Why is a credit in the current account a debit in the financial account?
Because it could come in the form of currency variation and deposits (if the payment is made in cash) or in trade credit (if the payment is financed)
What are the 3 reasons why debt accumulation could be considered a positive on the financial account?
- Capital inflows from debt
- Increase in liabilities (is a positive)
- When a country loans to another this can essentially be seen as investment from the foreign country therefore is an inflow on the part of the receiving country
Effectively when a country accumulates debt it is receiving funds from abroad which are treated as a positive on the financial account
Why are financial derivatives grouped alone?
Because they try to hedge risk rather than yield more income so are in their own grouping
What are the transactions of the financial account broken down into?
- Direct investment
- Portfolio investment
- Financial derivatives
- Other investments
- Reserve assets
What are considered to be ‘other investments’?
- Operations of currency
- Deposits
- Trade credit
What is the difference between GDP and GNI?
GDP focuses on the location of production. It includes the output produced by all resources located within the country, regardless of whether the resources are owned by residents or foreigners.
GNI focuses on the ownership of production. It includes all income earned by residents of a country, whether the income is generated within the country or from abroad. It also subtracts the income earned by foreigners within the country.
What does it mean if GNI > GDP?
It means many workers may go abroad sending back remittances. All the skilled labour is abroad so foreign firms are put off from entering
What must the total disposable income of domestic residents be equal to?
The total disposable income of domestic residents is equal to the uses for this income which can be private consumption, investment, government consumption, or transactions with the rest of the world
What does it mean when a current account balance is positive?
When the current account balance is positive, income is greater than expenditures in a country. In this case, the country lends to the rest of the world
What does a current account deficit mean regarding investment?
It means that investment in a country is greater than savings. Because it means the country is investing more than its saving such as in the US. (China is saving too much)
