Balance of Payments and Financial Globalization

Flashcards based on lecture notes about financial globalization and balance of payments.

Shocks

Unexpected changes that countries face.

Financial Globalization

Opening up to international financial markets, allowing borrowing, lending, and investing across borders.

Balance of Payments (BOP)

Record of all financial transactions between a country and the rest of the world.

Consumption Smoothing

Keeping spending stable despite fluctuations in income.

Long-Run Budget Constraint (LRBC)

A country's spending cannot exceed its income plus initial wealth, over time.

Trade Deficit/Surplus

When a country imports more than it exports (deficit) or exports more than it imports (surplus).

Precautionary Saving

Saving to prepare for future uncertainties or shocks.

Sovereign Wealth Fund

State-owned investment fund for managing savings.

Marginal Product of Capital (MPK)

Additional output from investing one more unit of capital.

Home Bias

The tendency of investors to prefer domestic over foreign investments.

Diversification

Spreading investments to reduce risk.

Risk Premium

Extra interest poorer countries pay because investors see them as risky.

Sudden Stops

When capital flows to a country suddenly stop, making it hard to roll over debt.

Precautionary Saving

What countries build up as reserves for emergencies.

Financial Openness

Helps countries invest more efficiently by borrowing to finance productive projects.

Sovereign Wealth Funds

Countries save foreign reserves or create these to buffer shocks.

Diversification

Means spreading investments to reduce risk.

Product Specialization

Countries produce what they do best, trade for other goods, benefiting both parties.

Financial Globalization

Countries can borrow when times are tough and lend when times are good.

Interest Rate Differentials

Rich countries lend at higher rates than they borrow.