The balance of payments
11 important questions on The balance of payments
Why is a good balance of payments important?
Deficits can lead to the government raising interest rates or to reduce public expenditure.
What is the definition of balance of payments?
What can we do with the balance of payments?
2. To see whether the country has been borrowing from/ lending to the rest of the world.
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How do we gather information on transactions?
- Information about government expenditure and receipts with foreign resident is obtained from local authorities and central government agencies
- The statistics are based on a reliable sample, but are still just an estimate. The IMF provides guidelines and publishes the balance of payments of all member countries.
What is the trade balance?
Invisible balance: the difference between revenue received for exports of services and payments made for import of services)
What is the formula for Balance of payments (BoP)?
> Accounted for a statistical error
What are the five types of economic transactions that take place between domestic and foreign residents?
2. An exchange of goods/services in return for other goods/services (barter)
3. An exchange of a financial item in return for a financial item
4. A transfer of goods and services with no corresponding quid pro quo (food aid)
5. A transfer of financial assets with no quid pro quo (gift)
By what is the US's NIIP affected?
2. Changes in the local currency values of US assets/liabilities (Price of US foreign stocks > US stocks owned by foreigners) =improvement of the NIIP
3. Changes in the dollar exchange rate: depreciation of the dollar against the euro will raise the value of a euro, so it improves the NIIP
What are mechanisms that could lead to correction of the US current account deficit?
2. Depreciation of the dollar in real trade-weighted terms
3. A decrease in US budget deficit through tax raises/ decrease in government expenditure
4. An. Increase in economic growth rates in other countries, which could increase US export
What is the identiy of an open economy?
Y = national income
C = domestic consumption
G= government expenditures
X = export expenditure
M = import expenditure
What is private savings in an open economy?
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