2.28 Balance of payments on the current account

What is a balance of payments?

It is a record of all transactions relating to international trade.

What is the capital and financial account?

It is the part of balance of payments where flows of savings, investment and currencies are recorded.

What is the current account?

It is the part of the balance of payments where all exports and imports are recorded.

What is the current balance?

It is the difference between total exports and total imports (visible and invisible)

What is a current account deficit?

It is when the value of imports exceeds the value of exports.

What is a current account surplus?

It is when value of exports exceed the value of imports.

What is the balance of trade (aka visible balance)?

It is the difference between visible exports and visible imports.

What is visible trade?

It is the trade in physical goods.

What is invisible trade?

It is the trade in services.

What is primary income?

It is money received from the loan of production factors abroad.

What is secondary income?

It is government transfers to and from overseas agencies (such as the EU)

What is the exchange rate?

It is the price of one currency in terms of another.

What is the relationship between the current account and exchange rates?

• If exchange rate stronger → exports more expensive → imports cheaper → less people buying local and their exports → negative impact on current account

• If exchange rate weaker → exports appear cheaper abroad → imports more expensive → Increase in demand for exports and local ppl → increase in AD → can result in inflation or increase in exchange rate

What are reasons for deficits and surpluses?

• Quality of domestic goods

• Quality of foreign

• Price of domestic goods

• Price of foreign goods

• Exchange rates between counties

What are impacts of current account deficits?

• Leakages from the economy

• Inflation

• Low demand for exports

• Funding the deficit