ib econ- 4.6: balance of payments

credits https://www.econinja.net/global-economy/4-6-balance-of-payments

what is balance of payments?

the difference between all money flowing into the economy, and all money flowing out of the economy in a given time period

what is a credit item?

payments received from foreign consumers, firms or governments

what is a debit item?

payments given to foreign consumers, firms or governments

what is the current account?

current account = money flowing into the economy (credit items) - money flowing out of the economy (debit items)

what is an account surplus?

when an accounts value of credit items is higher than the value of its debit items (in a given time period)

what is an account deficit?

when an accounts value of credit items is lower than the value of its debit items (in a given time period)

what are the three main accounts in the balance of payments?

the current account, the capital account and the financial account

what are the components of the current account?

essentially exports - imports

• balance of trade in goods: imports and exports of physical goods

• balance of trade in services: imports and exports of services

• net income

• current transfers: money transfers as part of programs like international aid or remittances

what are the components of the capital account?

a record of capital inflows and outflows across countries

• capital transfers: the movement of money as a result of debt forgiveness or people emigrating

• rights: includes intellectual property rights and land rights

what are the components of the financial account?

investments abroad:

• foreign direct investment (fdi): investment into capital abroad done by international companies

• portfolio investment: trading of international investment assets, such as stocks and bonds

• reserve assets: stockpiles of currency and other investments held by central banks

• official borrowing: gov. borrowing from other countries governments or institutions

what should the interdependence between the accounts be?

• in the long run, countries should not be able to run deficits, as countries can only spend as much as they earn

  • the three accounts should balance each other out and equal 0: current account = capital account + financial account

  • credit items should be matched by debit items

  • deficits should be matched by surpluses