Balance of Payments Quiz

Balance of Payments

Current Account

• Records transactions related to goods, services, income, and transfers between a country and the rest of the world
• Includes:
  • Trade in goods and services (exports and imports)
  • Income from abroad (e.g., dividends, interest)
  • Transfers (e.g., foreign aid, remittances)
• Current account balance:
  • Surplus: exports > imports
  • Deficit: imports > exports

Capital Account

• Records transactions related to the purchase and sale of assets between a country and the rest of the world
• Includes:
  • Foreign direct investment (FDI)
  • Portfolio investment (e.g., stocks, bonds)
  • Changes in reserve assets
• Capital account balance:
  • Surplus: net inflow of capital
  • Deficit: net outflow of capital

Trade Balance

• Part of the current account, records the difference between a country's exports and imports of goods
• Trade balance:
  • Surplus: exports > imports
  • Deficit: imports > exports

Foreign Exchange Reserves

• Holdings of foreign currencies and other foreign assets by a country's central bank
• Used to settle international transactions and maintain exchange rate stability
• Includes:
  • Foreign currencies
  • Gold
  • Special Drawing Rights (SDRs)

Exchange Rates

• The price of one currency in terms of another
• Types of exchange rates:
  • Nominal exchange rate: the current market rate
  • Real exchange rate: the rate adjusted for inflation
• Exchange rate systems:
  • Fixed exchange rate: government sets the rate
  • Floating exchange rate: market forces determine the rate
  • Managed float: a combination of fixed and floating rates

Balance of Payments

Current Account

• Records international transactions related to goods, services, income, and transfers
• Includes trade in goods and services, income from abroad, and transfers between a country and the rest of the world
• Current account balance is calculated by subtracting imports from exports
• Surplus occurs when exports exceed imports, while a deficit occurs when imports exceed exports

Capital Account

• Records international transactions related to the purchase and sale of assets
• Includes foreign direct investment, portfolio investment, and changes in reserve assets
• Capital account balance is calculated by subtracting outflows from inflows
• Surplus occurs when there is a net inflow of capital, while a deficit occurs when there is a net outflow of capital

Trade Balance

• Records the difference between a country's exports and imports of goods
• Part of the current account
• Trade balance surplus occurs when exports exceed imports, while a deficit occurs when imports exceed exports

Foreign Exchange Reserves

• Holdings of foreign currencies and other foreign assets by a country's central bank
• Used to settle international transactions, maintain exchange rate stability, and intervene in the foreign exchange market
• Includes foreign currencies, gold, and Special Drawing Rights (SDRs)

Exchange Rates

• The price of one currency in terms of another
• Nominal exchange rate is the current market rate, while the real exchange rate is the rate adjusted for inflation
• Exchange rate systems include fixed, floating, and managed float systems
• Fixed exchange rate is set by the government, while a floating exchange rate is determined by market forces
• Managed float is a combination of fixed and floating rates