4.1.7 Balance of Payments

• What is the balance of payments?

  A record of all financial transactions between one country and those in the rest of the world
• What will you have if money is flowing into the country?

  Credit (+)
• What will you have if money is flowing out of the country?

  Debit (-)
• What 3 accounts make up the balanceof payments?

  • Current account
  • Financial account
  • Capital account
• What is the current account?

  Shows a countries day-to-day transactions with other countries
• What sums are the current accounts made of?

  • Trade in goods balance
  • Trade in service balance
  • Primary income
  • Secondary income/transfers
• What does the trade in goods and services include?

  Includes the export and import of tangible goods and intangible services 
• What does primary income include?

  Includes income earned by residents from factors of production used abroad 
• What does secondary income include?

  Includes income earned by residents from investments abroad
• What are transfers?

  Unilateral transfers of funds between countries, without the expectation of a reciprocal payment 
• If the sum of the current account is positive, what will there be?

  Current account surplus
• If the sum of current account is negative, what will there be?

  Current account deficit
• Why is primary income important?

  Reflects the income a country's residents earn from their economic activities abroad
• What does secondary income include?

  • Investment Income (Income earned from investments in foreign assets, such as stocks, bonds, and real estate)
  • Remittances (Money sent home by individuals working abroad)
  • Other Secondary Income (Other types of income that do not fall into the categories of investment income or remittances, such as royalties and licence fees)
• What is the capital account?

  The capital account is a small part of the overall balance of payments
• What does the capital account include?

  • Capital transfers:
  • Debt forgiveness
  • Gits 
  • Inheritance
  • Non-Produced, non financial assets
  • Patens 
  • Copyrights
  • Licences
• What is the financial account?

  Records transactions involving the transfer of financial assets and liabilities
• What does the financial account include?

  Transactions that result in a change of ownership of financial assets and liabilities between a country’s residents and non-residents
• What does the financial account include?

  • FDI
  • Portfolio investment
  • Reserves
• What is a portfolio investment?

  When people/businesses from one country buys shares or other securities such as bonds in another nation
• What are the causes of a current account deficit?

  • Import-led economic growth
  • Overvalued exchange rate
  • High domestic consumption
  • High domestic inflation
  • Government policies
• What are the expenditure reducing policies?

  • Contractionary monetary policy
  • Contractionary fiscal policy
• What are the issues with expenditure reducing policies?

  • Conflict of objectives
  • Consumer business confidence
  • Output gap
  • MPM
• What are protectionism expenditure switching policies?

  • Tariffs
  • Quotas
  • Non-tariff barriers
  • Embargoes
  • Domestic subsidies
• What do weaker exchange rate expenditure switching policies do?

  • Decreased interest rate
  • Increased money supply
  • Sell domestic currency reserves
• What are issues with the weaker exchange rate expenditure switching policies?

  • Marshall-lerner condition
  • Inflation
  • Retaliation and currency wars
• What policies could be used to boost international competitiveness?

  Supply side policies
• What are issues with supply side policies used to boost international competitiveness?

  • Time
  • Cost
  • No guarantee of success
• What are evaluation points for expenditure reducing and expenditure switching policies?

  • Conflict of objectives
  • Cause of the current account deficit
  • Time lags/cost
  • Is the current account deficit really a problem