4.6 Balance of Payments

• Balance of Payments

  A record of all economic transactions between the residents of a country and the rest of the world over a given period.
• Current Account

  Part of the balance of payments that records a country's transactions in goods, services, income, and transfers with the rest of the world.
• Capital Account

  The part of the balance of payments that records capital transfers and transactions in non-produced, non-financial assets.
• Financial Account

  Component of the balance of payments that tracks changes in ownership of foreign financial assets.
• Credits

  Positive entries in the balance of payments, representing inflows of foreign exchange.
• Debits

  Negative entries in the balance of payments, representing outflows of foreign exchange.
• Deficits

  Occurs when a country's imports exceed its exports in the balance of payments.
• Surpluses

  Occurs when a country's exports exceed its imports in the balance of payments.
• Direct Investment

  Investment made by a company or individual in a foreign country, typically through the acquisition of a foreign company or the establishment of business operations.
• Portfolio Investment

  Investment in a collection of assets, such as stocks and bonds, with the expectation of earning a return.
• Reserve Assets

  Foreign currency, gold, SDRs, and other assets held by a country's central bank to support the value of its currency.
• Official Borrowing

  Borrowing by a government from foreign sources, such as other governments or international financial institutions.
• Expenditure-Switching Policies

  Policies aimed at switching domestic expenditure from imports to domestically produced goods and services.
• Expenditure-Reducing Policies

  Policies designed to reduce overall domestic expenditure in an economy.
• Marshall-Lerner Condition

  A condition stating that a currency devaluation or depreciation will improve the current account balance if the sum of price elasticities of demand for exports and imports is greater than 1.
• J-curve

  A theory that suggests a country's trade balance initially worsens following a currency devaluation before improving in the long run.