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3.2 How the economy works
3.2.4 International trade and the global economy
3.2.4.2 Balance of payments
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Cards (33)
The current account measures trade in goods,
services
, and income.
True
Match the current account component with its description:
Trade in Goods ↔️ Value of exported and imported goods
Trade in Services ↔️ Value of services exchanged internationally
Income ↔️ Earnings on investments abroad
Net Transfers ↔️ Financial transfers like foreign aid
The capital account and financial account are part of the balance of
payments
Match the account with its key focus:
Capital Account ↔️ Transfer of capital and assets
Financial Account ↔️ Change in ownership of assets
What does the current account track in a country's balance of payments?
Trade, income, net transfers
What does the "Trade in Goods" component measure in the current account?
Exported and imported goods
What is included in the "Net Transfers" component of the current account?
Foreign aid and gifts
What does the financial account measure in the balance of payments?
Change in ownership of assets
What are the key differences between the capital and financial accounts?
Asset transfer vs ownership change
Higher domestic inflation can worsen the
trade balance
.
True
Why is the balance of payments crucial for the global economy?
Tracks trade and investment
International cooperation and trade agreements can stabilize global balances by reducing trade
barriers
.
True
What is the balance of payments?
Record of economic transactions
What does the capital account measure?
Flow of capital
Steps to understand the balance of payments
1️⃣ Identify the current account
2️⃣ Identify the capital account
3️⃣ Analyze trade balance
4️⃣ Assess investment income
5️⃣ Track financial asset flows
The capital account focuses on the change in ownership of assets.
False
Why is the balance of payments important for a global economy?
Tracks economic interactions
The current account is part of the **balance of
payments
The capital and financial accounts are other main components of the balance of
payments
The capital account focuses on asset ownership changes, while the financial account focuses on asset transfers.
False
The capital account includes foreign direct investment, while the financial account includes
loans
How do higher domestic interest rates affect capital flows?
Attract foreign capital
What fiscal policy can a country use to reduce a current account deficit?
Reduce government spending
The balance of payments consists of two main accounts: the current account and the capital
account
How many key components does the current account have?
Four
The current account includes trade in goods, services, income, and net
transfers
The "Income" component includes
earnings
on investments abroad.
True
Government policies such as tariffs can directly impact trade and investment flows in the balance of
payments
The current account measures the trade in goods, services, income, and net
transfers
What does the financial account include?
Loans and securities
Match the account with its key components:
Capital Account ↔️ Foreign direct investment
Financial Account ↔️ Loans and securities
How does a weaker domestic currency affect the balance of payments?
Exports become cheaper
To manage a current account surplus, a country can stimulate
imports