All Flashcards
What is the Balance of Payments (BOP)?
A record of all international transactions in a year.
What is the Current Account?
Tracks the flow of goods, services, and income.
What is the Capital Account?
Tracks the flow of investments (assets).
What are Net Exports?
The value of a country's exports minus the value of its imports.
What is a Trade Surplus?
When a country's exports are greater than its imports.
What is a Trade Deficit?
When a country's imports are greater than its exports.
What is Net Investment Income?
Interest and dividends paid to or from domestic investors.
What are Net Transfers?
Aid, grants, and other transfers of income.
What is the Official Reserves Account?
An account holding foreign currency reserves controlled by a central bank.
What is financial investment in the capital account?
The purchase of financial assets like stocks and bonds.
How does a U.S. company exporting goods to Europe affect the U.S. Balance of Payments?
It is a positive entry in the current account, specifically in net exports.
How does a foreign investor purchasing U.S. Treasury bonds affect the U.S. Balance of Payments?
It is a positive entry in the capital account, as foreign money flows into the U.S.
How does a U.S. citizen buying stock in a foreign company affect the U.S. Balance of Payments?
It is a negative entry in the capital account, as U.S. money flows out of the country.
If a country has a large trade deficit, what does this imply about its current account?
It implies that the country likely has a current account deficit, assuming other components of the current account do not offset the trade deficit.
How does an increase in foreign aid given by the U.S. affect the current account?
It is recorded as a negative entry in the net transfers section of the current account.
How does the Fed use official reserves to manage a balance of payments deficit?
The Fed uses its official reserves to cover the deficit, decreasing the reserves.
How does the circular flow of dollars relate to the balance of payments?
Dollars sent abroad for imports eventually return through purchases of goods/services or assets, balancing the BOP.
How does a trade surplus impact a country's currency value?
It tends to increase the demand for the country's currency, potentially leading to appreciation.
How does an increase in domestic interest rates affect the capital account?
It can attract foreign investment, leading to a capital account surplus.
How does a government's decision to purchase foreign currency affect the official reserves account?
It increases the official reserves account balance.
How would tariffs on imports affect the current account?
Tariffs may decrease imports, potentially improving the current account balance.
What is the impact of expansionary monetary policy on the capital account?
Lower interest rates may decrease foreign investment, potentially worsening the capital account.
How does increased government spending on infrastructure projects affect the balance of payments?
Increased imports of materials may worsen the current account; increased foreign investment could improve the capital account.
How does a country's decision to devalue its currency affect its trade balance?
Devaluation makes exports cheaper and imports more expensive, potentially improving the trade balance.
What is the effect of capital controls on the capital account?
Capital controls restrict the flow of investments, potentially limiting both inflows and outflows.
How does a policy promoting domestic investment affect the capital account?
It may reduce the need for foreign investment, potentially decreasing capital inflows.
How does a policy of quantitative easing affect the balance of payments?
It can lower interest rates, potentially decreasing capital inflows and depreciating the currency.
How does a policy of attracting foreign direct investment (FDI) affect the capital account?
It increases capital inflows, leading to a capital account surplus.
How does a policy of providing subsidies to domestic exporters affect the current account?
It increases exports, improving the current account balance.
How does a policy of increasing taxes on foreign investment income affect the current account?
It may reduce net investment income outflows, improving the current account balance.