2.5.4 Trade and balance of payments

• What is trade in economics?

  Exchange of goods or services
• Domestic trade occurs within a country, while international trade involves transactions across national borders
• Domestic trade uses different currencies than international trade.

  False
• What is the balance of payments (BoP)?

  Record of economic transactions
• The current account in the BoP includes trade in goods, trade in services, primary income, and secondary income
• Order the categories of the current account:

  1️⃣ Trade in goods

  2️⃣ Trade in services

  3️⃣ Primary income

  4️⃣ Secondary income
• What does the capital account in the BoP record?

  Debt forgiveness
• The BoP equation states that the balance of payments equals the sum of the current account and the capital and financial accounts.
• What does a positive trade balance indicate?

  Trade surplus
• The current account surplus means a country is earning more from exports, primary income, and secondary income than it spends on imports
• Match the factor with its effect on the trade balance:

  Weaker currency ↔️ Boosts exports

  Lower inflation ↔️ Increases exports

  Global recession ↔️ Reduces exports

  Strong comparative advantage ↔️ Higher export earnings
• What is the formula for calculating the trade balance?

  $Exports - Imports$
• A weaker currency reduces the cost of exports for foreign buyers.
• Which factor allows a country to specialize in producing certain goods or services?

  Comparative advantage
• A weaker currency makes exports cheaper
• Order the components of the current account based on their influence on the balance:

  1️⃣ Trade in goods

  2️⃣ Trade in services

  3️⃣ Primary income

  4️⃣ Secondary income
• How does a weaker currency affect trade?

  Boosts exports
• Countries with a strong comparative advantage have higher export earnings.
• Changes in global economic conditions affect global demand
• What does lower inflation relative to trading partners do for exports?

  Increases them
• Match the factor with its impact on trade:

  Exchange rates ↔️ Boost exports

  Comparative advantage ↔️ Higher export earnings

  Global demand ↔️ Increased export demand

  Relative inflation ↔️ Lower inflation boosts exports
• Lower inflation relative to trading partners can increase exports
• A weaker currency boosts exports and reduces imports.
• Countries with a strong comparative advantage have higher export earnings
• What affects export demand according to the study material?

  Global economic conditions
• Match the factor with its impact on trade:

  Exchange Rates ↔️ Weaker currency boosts exports

  Comparative Advantage ↔️ Increases export earnings

  Global Demand ↔️ Affects export demand

  Relative Inflation Rates ↔️ Lower inflation increases exports
• A trade deficit arises when imports exceed exports
• A trade surplus occurs when exports exceed imports.
• A trade deficit potentially reduces GDP and increases foreign debt.
• Match the trade imbalance with its impact on the economy:

  Trade Deficit ↔️ Potentially reduces GDP

  Trade Surplus ↔️ Can boost GDP
• A persistent trade deficit may lead to currency depreciation
• What happens to a country's exports when its currency depreciates due to a trade deficit?

  Exports become more competitive
• What is a trade imbalance?

  Exports ≠ imports
• What is a trade deficit?

  Imports > exports
• What is a trade surplus?

  Exports > imports
• Match the trade imbalance type with its economic consequences:

  Trade Deficit ↔️ Reduced GDP, increased debt

  Trade Surplus ↔️ Boosted GDP, exchange reserves
• What are the causes of a trade deficit?

  High consumption, low savings
• What are the consequences of a trade deficit?

  Downward pressure on currency
• A country with a persistent trade deficit may see its currency depreciate
• What is the role of trade in economic development?

  Specialization based on advantage