Eco Unit 3- balance of payment, exchange rate and international competitiveness

What is the balance of payments?

A record of all economic transactions between residents of a country and the rest of the world over a specific period.

What are the main components of the balance of payments?

The current account, capital account, and financial account.

What does the current account reflect?

The balance of trade in goods and services, net income from abroad, and net current transfers.

What is a trade deficit?

When a country's imports exceed its exports, resulting in a negative balance in the current account.

What factors influence exchange rates?

Interest rates, inflation, political stability, economic performance, and speculation.

What is an appreciation of a currency?

An increase in the value of a currency in relation to others, making imports cheaper and exports more expensive.

What is a depreciation of a currency?

A decrease in the value of a currency relative to others, making exports cheaper and imports more expensive.

How can a country's exchange rate policy affect its competitiveness?

A weaker currency can make a country’s exports cheaper and more attractive to foreign buyers, enhancing competitiveness.

What is international competitiveness?

The ability of a country to sell its goods and services in the global market while maintaining or improving its standards of living.

What role do tariffs play in international trade?

Tariffs are taxes on imports that can protect domestic industries but may lead to retaliation and higher prices for consumers.

What is the purpose of the balance of payments?

To provide a summary of a country's economic transactions with the rest of the world.

What are the components of the current account?

Trade in goods, trade in services, income receipts, and current transfers.

What does a surplus in the current account indicate?

A country is exporting more goods and services than it is importing.

What is the capital account?

A section of the balance of payments that records capital transfers and the acquisition/disposal of non-produced, non-financial assets.

What does the financial account track?

Investments made by residents in foreign assets and investments made by foreigners in domestic assets.

What is the balance of trade?

The difference between a country's exports and imports of goods.

What is meant by net income from abroad?

Income residents earn from foreign investments minus payments made to foreign investors.

How do current transfers affect the balance of payments?

They include remittances and foreign aid, which can impact the current account balance.

What is a trade surplus?

When a country's exports exceed its imports.

What are depreciation and appreciation of currency?

Depreciation is a fall in a currency's value; appreciation is a rise in its value.

What are the implications of currency depreciation for exports?

It makes exports cheaper for foreign buyers, potentially boosting sales.

What does international competitiveness mean?

A country's ability to compete effectively in the global market.

How can inflation affect a country's competitiveness?

Higher inflation can erode competitiveness by making exports more expensive.

What role does fiscal policy play in the balance of payments?

Government spending and tax decisions can influence national savings and consumption.

How do interest rates impact the exchange rate?

Higher interest rates can attract foreign capital, increasing demand for a currency.

What is exchange rate manipulation?

Deliberate actions by a government to influence the value of its currency.

What are the effects of tariffs on the balance of payments?

They can improve the current account balance by reducing imports.

How might subsidies affect international competitiveness?

They can lower production costs, making exports more competitively priced.

What is the role of speculators in the foreign exchange market?

To profit from changes in exchange rates by buying and selling currencies.

What factors determine currency demand?

Interest rates, economic indicators, and political stability.

What is the difference between fixed and floating exchange rates?

Fixed rates are set by government policy; floating rates are determined by market forces.

Why might a country choose a floating exchange rate?

To allow for automatic adjustment in response to economic changes.

What is the current account deficit?

When a country spends more on foreign trade than it earns.

How can governments respond to a current account deficit?

By implementing policies such as currency devaluation or trade restrictions.

What are the non-tariff barriers to trade?

Regulations or standards that countries impose to restrict imports without using tariffs.

What is purchasing power parity (PPP)?

The theory that exchange rates should adjust to equalize the purchasing power of different currencies.

What is a currency peg?

A policy of fixing a country's exchange rate to another currency.

How does globalization impact international competitiveness?

It increases competition but also provides access to larger markets.

What are capital controls?

Regulations that a government imposes to limit capital flows in and out of the country.

What impact can economic sanctions have on the balance of payments?

They can negatively affect a country's trade and foreign investment.

What is foreign direct investment (FDI)?

Investment by a company in assets in another country with the aim of establishing a lasting interest.

How does a country's geography affect its trade patterns?

Physical location can influence transportation costs and trade opportunities.

What is a managed float exchange rate?

A hybrid system where a currency mainly floats, but central banks intervene occasionally.

Why are export credits important for businesses?

They help new companies to sell goods abroad by providing financial support.

What is a current account adjustment?

The process by which a country corrects a current account imbalance over time.

How does the labor market affect international competitiveness?

The availability and skill level of workers can influence production costs.

What is the term for when a country relies heavily on imports?

Import dependence.

What is a competitive devaluation?

A strategy where a country deliberately lowers its currency value to boost exports.

How can consumer preferences influence trade patterns?

Shifting preferences can change demand for imported versus domestic goods.

What impact does political stability have on an economy's balance of payments?

Political stability can enhance investor confidence, positively affecting the balance.

What is the significance of service trade in the current account?

Services contribute significantly to many countries' economic income, affecting the balance.

How can social policies affect international competitiveness?

Policies providing a skilled workforce can enhance a country's competitiveness globally.

What factors might lead to a trade war?

Conflicts arising from tariffs, trade barriers, and disputes over unfair trading practices.

How does the concept of absolute advantage relate to trade?

A country has an absolute advantage if it can produce a good more efficiently than another country.

What is a negative exchange rate spread?

When the selling price of a currency is less than the buying price, resulting in a loss.

How do international agreements influence trade?

They can lower tariffs and promote free trade between countries.

What is the significance of a country's national debt in the balance of payments context?

High national debt can affect investor confidence and impact currency value.