Week 3 Flashcards
What is a balance of payments with regards to countries?
The summary of exports and imports of goods, services, and financial assets, along with transfer paymetns (like foreign aid) of an economy with the rest of the world.
It acts as a summary of how resources flow between one economy and its trading partners.
it consists of a current account, capital account, and financial account.
What is a current account?
The current account details the net flow of money from international trade. It contains the trade balance (expors-imports), the primary income (any wages and dividends), and secondary income (tax payments and refunds and current transfers (e.g emergency food aid (provision of goods without payment.
What is a capital ccount?
A capital account contains small dollar value transactions not on the current account, these are: transfer of ownership between residents and non-residents, and transactions of intangible assets, and rights to use land or water.
What is a financial account?
The financial account of for large dollar transactions between parties that involve a change of ownership of a country’s assets or liabilities.
This could be via:
Direct investment, the long-term capital investment in a business, and the investor has significant voting power (10% and up) in the business.
Portfolio investment, the purchase of equity or debt in a business.
Reserve assets: Purchases or sale of reserve assets held by the reserve bank.
Other investments, such as trade credit, purchasing goods from overseas without paying until they arrive, or currency and deposits from banks across borders.
What are reserve assets used for?
To help a currencies value in the short term.
What is provision of economic value recorded as? What about received? How does this apply to balance of payments? What must be done occasionally if
When economic value is provided it is recorded as a credit on the current account. When economic value is received it is recorded as debit on the current account.
Balance of payments should be zero since every transaction has two offsetting entries. (e.g a credit for shipping a shipment, and a debit for our payment).
Sometimes the accounts may not balance in practice due to measurement errors and omissions, as such we have a net errors and omissions section to make the accounts balance.
What occurs with balance of payments if the current account is positive or negative?
If the current account is positive then we will expect the financial and capital accounts to be negative to balance it.
Does a debit entry demand or supply the home currency relative to a foreign currency, What about the outflow and inflow of the currency? What about credit?
A debit entry will outflow the home currency, increasing it’s supply. A credit entry will cause inflow of the home currency, increasing demand
What are some of the concerns of having a low current account balance?
A negative current account balance will means we have a positive financial and capital account. This means that foreign investors will have greater claims on home assets. The deficit can also not be sustained indefinitely, and it suggests too much short term spending is being done.
What is New Zealand’s balance of payment’s typically like?
Current account negative. Financial account, and capital account typically positive.
What components of the financial account are credit? What about debit?
Debit(Assets): Direct investment outflow, portfolio investment outflow, other capital outflow, and official reserve assets(if they increase).
Credit(Liabilities: official reserve assets(if they decrease), direct investment inflow, portfolio investment infolw, other capital inflow, and net errors and omissions.
What is weird about China’s balance of payments?
It has both a positive financial account balance and current account balance. They believe this to be largely due to the low cost of labor in China, and the strong growth of the country as a reason for investment.
What are some important events that increased international trade volume?
The removal of the berlin wall, the single european act of 1987, the North American free trade agreement, the general agreement on tariffs and trade, the inception of the euro, and the expansion of the European union are some of the main ones.
What are some important factors that affect international trade flows?
The cost of labour, inflation, national income, credit conditions, and government policies.
What is the impact of exchange rate on trade flows? How can this solution be limited?
The current account will decrease if the home currency appreciates relative to other currencies (selling more than bought). When a home currency is exchanged for foreign currency to buy foreign goods, then the home currency faced downward pressure, leading to increased foreign demand for the country’s products. This solution can be limited by: competition, impact of other currencies, prearranged international trade transactions, intracompany trade.
