2.1.4 Balance of Payments

• Balance of payments records all financial transactions made between consumers, businesses and the Government in the country with other nations
• What are in inflows and outflows of a balance of payment account?

  Inflows of foreign currency are positive

  Outflows of foreign currency are negative
• The current account of the balance of payment is the main measure of external trade performance
• What are some causes of a current account deficit?

  Poor price competitiveness

  Strong exchange rates affecting exports and imports

  Recession in one or more major trade partner countries

  Volatile global prices (commodities)
• What are some items in the current account of BOP?

  Trade balance in goods

  Trade balance in services

  Net money transfers

  Net investment income from overseas assets
• What is the balance of trade?

  The value of exports of goods and services minus value spent on imported goods and services
• What is the capital account?

  Sales/transfer of patents, copyrights, franchises, leases and other transferable contracts and goodwill
• What is the current account?

  Overall balance of trade in goods and services and net balance for primary and secondary income
• What is current account deficit?

  A deficit occurs when the value of imports of goods/services/investment incomes/secondary incomes is greater than the value of exports
• What is current account surplus?

  A surplus occurs when the value of exports of goods/services/investment incomes/secondary incomes is greater than the value of imports
• What is the financial account?

  Transactions that result in a change of ownership of financial assets and liabilities between countries
• What is foreign direct investment?

  Investment made by a firm or individual in one country into business interests located in another country
• What are hot money flows?

  Money that moves rapidly around the global financial system seeking the best risk-adjusted rate of return
• What is investment income?

  Income from equity (dividends) and on debt (interest)
• What is a portfolio investment?

  Inflows and outflows of debt and equity
• What is primary income?

  Incomes from interest, profits, dividends from overseas investment and also migrant remittances
• What is secondary income?

  Includes spending on military aid and overseas development aid, spending on something on nothing
• What is trade deficit?

  When the value of imports is higher than the value of a country's exports (M>X)
• What is trade surplus?

  When the value of exports is higher than the value of a country's imports (X>M)