balance of payments

What is the balance of payments?

A record of all financial transactions made between consumers, firms, and the government from one country with other countries.

What do exports indicate in the balance of payments?

Exports are an inflow of money and are recorded as positive.

What do imports indicate in the balance of payments?

Imports are an outflow of money and are recorded as negative.

What are the major components of the balance of payments?

The current account, the capital account, and the financial account.

What is included in the current account?

Economic transactions, including trade in goods and services, income, and current transfers.

What comprises the capital account?

Transfers of ownership of fixed assets.

What is the purpose of the balancing item in the balance of payments?

To cover discrepancies when the sum of the accounts does not equal zero.

What indicates a current account surplus?

A net inflow of money into the circular flow of income.

What effect does a stronger currency have on imports and exports?

It makes imports cheaper and exports more expensive, potentially worsening the current account deficit.

How can economic growth affect the balance of payments?

It increases consumer incomes and demand, potentially leading to higher imports.

What is deindustrialization, and how does it impact the balance of payments?

The decline of the manufacturing sector that forces a country to import goods it previously produced, worsening the deficit.

What is the consequence of a current account deficit?

It may lead to financial difficulties in financing the deficit.

Why is achieving a sustainable balance of payments important?

It enables a country to sustainably finance its current account and supports long-term growth.

How does fiscal policy address imbalances in the balance of payments?

By increasing income tax to reduce disposable income and thus cut imports.

What is an expenditure-reducing policy?

A policy aimed at reducing overall demand in the economy to lower imports.

What are supply-side policies intended to achieve?

They aim to increase productivity and international competitiveness, potentially raising exports.

What risk is associated with subsidies to domestic industries?

It may provoke retaliation from foreign countries viewing it as unfair protectionism.