3.3. Balance of Payments

Balance of Payments

A record of the value of all of a country's inflows and outflows of funds over a year.

Credit

An inflow of funds into the country.

Debit

An outflow of funds out of the country.

Current Account

Measures the net inflows and outflows of funds from: trade in goods and services, income and current transfers.

Balance of trade in goods

Export revenue from goods, minus import expenditure on goods

Balance of trade in services

Export revenue from services, minus import expenditure on services.

Income (Current Account)

Net inflows and outflows of funds from net factor income (rent, interest, profits)

Current Transfers

Transfers of income between countries with no exchange of goods and services (e.g. aid, remittances).

Current Account Surplus

When a country's inflows of funds are greater than its outflows of funds from trade in goods and services, income and current transfers.

Current Account Deficit

When a country's inflows of funds are less than its outflows of funds from trade in goods and services, income and current transfers.

Capital Account

Measures the net inflows and outflows of funds from: capital transfers and transactions in non-produced, non-financial assets.

Capital Transfers

Transfers of capital between countries from factors including migration and debt forgiveness.

Transactions in non-produced, non-financial assets

Net inflows and outflows of funds from purchasing assets that are not produced and not financial (including patents/copyright).

Financial Account

Measures the net inflows and outflows of funds from: direct investment, portfolio investment and reserve assets.

Direct Investment

Net inflows and outflows of funds from long-term purchases of overseas financial assets, including purchases of foreign firms.

Portfolio Investment

Recorded in the financial account: net inflows and outflows of funds from short-term purchases of overseas financial assets, including stocks and bonds.

Reserve Assets

Net inflows and outflows of funds from purchases of foreign currency reserves.

Financial Account Surplus

When a country's inflows of funds are greater than its outflows of funds from direct investment, portfolio investment and reserve assets.

Financial Account Deficit

When a country's inflows of funds are less than its outflows of funds from direct investment, portfolio investment and reserve assets.

A country has a current account deficit. Ceteris paribus, this will put pressure on its exchange rate to...

...depreciate

A country has a current account surplus. Ceteris paribus, this will put pressure on its exchange rate to...

...appreciate.

Expenditure Switching Policies

Government policies aimed at reducing a current account deficit by switching consumer spending from imports to domestic consumption.

Expenditure Reducing Policies

Government policies aimed at reducing a current account deficit by reducing consumer spending in order to reduce spending on imports.

Supply-Side Policies

Policies aimed at reducing the current account deficit by improving the quality or quantity of the factors of production, thereby making domestic production more efficient and increasing export revenue.

Marshall-Lerner Condition

A currency depreciation/devaluation will only improve a current account deficit if PEDx+PEDm>1.

J Curve

A currency depreciation/devaluation will only improve a current account deficit in the long-term, once the demand for exports and the demand for imports have become elastic.