The balance of payments - What is meant by a balance of payments surplus or deficit?
5 important questions on The balance of payments - What is meant by a balance of payments surplus or deficit?
How can one interpret a current account deficit which is more than covered by a net capital inflow (basic balance is in surplus)?
2. The basic balance surplus could be a problem, because the long-term borrowing will lead to future interest, profits and dividend payments, which will worsen the current account deficit
> If a country with a CA deficit receives FDI (foreign direct investment) this can be interpreted as a sign of confidence.
- In the long term FDI can increase the country's capital stock and future export earnings
What is the settlement balance?
> The autonomous items: all the current; financial; and capital account transactions (including errors)
> Accomodating items: transactions that the monetary authorities have undertaken as indicated by the settlements balance.
The settlement concept ignores the fact that the authorities have other instruments to influence the exchange rate (capital control, interest rate control)
> Does not show the real threat to domestic currency and reserves represented by liquid liabilities
What does it mean when the sum of current accounts (CA) & capital account (KA) is negative?
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What does it mean if there are floating exhange rates in a country for the sub-accounts in the balance of payments?
> This means that there are no changes in reserves
- Sales of currency > purchases of the currency --> currency depreciates (supply>demand)
- Sales of currency < purchases of the currency --> currency appreciates (demand>supply)
What does it mean if there are fixed exchange rates?
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