4.3.4 The balance of payments on current account

• What does the balance of payments current account record?

  Transactions with the world
• Match the current account component with its description:

  Trade Balance ↔️ Exports and imports of goods and services

  Income Balance ↔️ Net income from investments and employment

  Transfers Balance ↔️ Net current transfers
• Order the components of the balance of payments current account:

  1️⃣ Trade Balance

  2️⃣ Income Balance

  3️⃣ Transfers Balance
• The income balance measures net income from investments and employment
• Match the current account balance with its impact:

  Surplus ↔️ Capital inflows

  Deficit ↔️ Capital outflows
• Higher relative inflation makes domestic goods less competitive
• A current account surplus can lead to potential inflationary pressures.


  True
• A stronger domestic currency makes imports cheaper
• How does a stronger domestic currency affect the current account balance?

  Worsens trade balance
• Match the global economic condition with its impact on the current account:

  Recession in major trading partners ↔️ Reduces export demand

  Global economic boom ↔️ Increases export demand
• Why is reducing export subsidies a policy to address a current account surplus?

  Rebalances trade account
• What is the purpose of reducing import restrictions to address a current account deficit?

  Offsets trade deficit
• What are the three main components of the balance of payments current account?

  Trade, income, transfers
• A current account surplus can lead to inflationary pressures due to increased foreign investment.


  True
• A current account deficit always leads to immediate currency depreciation.

  False
• A current account deficit can increase the risk of currency depreciation.


  True
• Faster domestic economic growth tends to widen the current account deficit.
• Lower domestic savings can increase the need for foreign capital.
• What is one policy to address a current account surplus?

  Appreciate the exchange rate
• What is one policy to address a current account deficit?

  Depreciate the exchange rate
• What effect does a current account surplus have on the exchange rate?

  Currency appreciation
• Which country consistently runs a current account surplus due to strong exports of manufactured goods?

  Germany
• A current account deficit is sustainable if it reflects high domestic investment funded by foreign capital.


  True
• The trade balance records a country's exports and imports of goods and services
• What is the overall sum of the three components of the current account?

  Overall economic transactions
• What does the trade balance specifically measure?

  Exports and imports
• What does a current account surplus indicate about a country's economy?

  Earnings exceed expenses
• How does faster domestic economic growth affect the current account balance?

  Increases imports
• What does the trade balance measure in the current account?

  Difference between exports and imports
• What are the main factors that can affect a country's current account balance?

  Domestic growth, exchange rate
• Lower domestic savings can lead to a current account deficit.

  True
• What are policies to address a current account surplus?

  Appreciate exchange rate
• Depreciating the exchange rate improves the trade balance by making exports cheaper.


  True
• How does a current account surplus affect the exchange rate?

  Currency appreciation
• Match the component of the current account with its description:

  Trade Balance ↔️ Exports and imports of goods and services

  Income Balance ↔️ Net income from investments and employment

  Transfers Balance ↔️ Net current transfers
• What does the current account balance reflect in a country's economy?

  Earnings and expenses in trade
• What is one potential impact of a current account surplus?

  Inflationary pressures
• Match the account balance with its impact:

  Surplus ↔️ Increased foreign investment

  Deficit ↔️ Reliance on foreign capital
• A stronger domestic currency makes exports cheaper and imports more expensive.

  False
• Budget deficits in government fiscal policy tend to worsen the current account deficit.

  True