Balance of Payments – Current Account Deficits & Surpluses

30 vocabulary flashcards covering definitions, causes, consequences, and justifications of current-account deficits and surpluses, as discussed in the lecture notes.

Balance of Payments (BoP)

A country’s record of all economic transactions with the rest of the world, including the current, capital and financial accounts.

Current Account (CA)

Section of the BoP that records trade in goods and services, primary income and secondary income flows.

Current Account Deficit (CAD)

Occurs when CA debits (outflows) exceed credits (inflows); i.e., imports of goods/services and income payments are greater than exports and income receipts.

Current Account Surplus (CAS)

Occurs when CA credits exceed debits; exports and income receipts are larger than imports and income payments.

Credit Item

Transaction that brings foreign currency into the country (e.g., exports, income receipts).

Debit Item

Transaction that sends domestic currency out of the country (e.g., imports, income payments).

Exports (X)

Goods or services sold to foreign residents; counted as credits in the CA.

Imports (M)

Goods or services purchased from abroad; counted as debits in the CA.

Exchange Rate (ER)

The price of one currency in terms of another; affects the relative price of imports and exports.

Standard of Living (SOL)

The level of material well-being enjoyed by individuals, often linked to consumption of goods and services.

Aggregate Demand (AD)

Total spending on domestic output: C + I + G + (X − M).

National Income (NY)

Total income earned by a nation’s factors of production; often proxied by GDP.

Demand-Pull Inflation

Inflation arising when AD exceeds full-employment output (Yf).

Productive Capacity

The economy’s ability to produce goods/services; limited capacity can force higher imports.

Boom in Consumer Demand

A rapid rise in household spending that often increases import demand and widens a CAD.

Foreign Direct Investment (FDI)

Long-term investment by foreign firms in domestic businesses; can finance a CAD.

Capital Goods Imports

Purchases of machinery and equipment from abroad used to produce other goods; may justify a CAD by boosting future growth.

Inflation Differential

Situation where domestic inflation exceeds foreign inflation, making exports less competitive and widening a CAD.

Structural Competitiveness

Cost and productivity advantages (education, innovation, low inflation) that make exports attractive and support a CAS.

Deindustrialisation

Long-run decline of a country’s manufacturing sector, possibly triggered by a persistently high ER from a CAS.

Retaliation (Trade)

Protective measures like tariffs or quotas imposed by deficit countries against surplus countries’ exports.

Living Beyond Means

Consuming more than is produced domestically, financed by borrowing or selling assets—often reflected in a CAD.

Money Supply Effect of Surplus

A CAS can expand domestic money supply as export earnings flow in, fuelling inflationary pressure.

CAD as % of GDP

Metric used to judge the sustainability of a deficit relative to the size of the economy.

CAS Consumption Constraint

When a surplus indicates residents are saving or exporting rather than consuming, potentially lowering attainable SOL.

Price Elasticity of Demand for Exports

Sensitivity of foreign demand to price changes; if elastic, ER appreciation can sharply cut export volumes.

Imports as Leakage

Spending that exits the domestic circular flow, reducing income and employment.

Exports as Injection

Foreign spending that enters the domestic economy, boosting income and employment.

Recession-Driven Surplus

CA surplus arising from weak domestic demand and reduced imports during an economic downturn.

Size-Driven Sustainability

Idea that a CAD may be harmless if economic growth exceeds the growth of foreign debt, keeping debt-to-GDP manageable.