Balance of Payments Quiz

Consolidated Balance Sheet of H Economy

• A (Real): The real financial component of the economy's balance sheet.
• L (Financial): The financial component of the balance sheet.
• KH: Key financial component.
• W: Another key financial component.
• E: Equity, including bonds and loan assets.
• B: The sum of bonds and loan assets.
• M: Money (as cash and other liquid assets).
• NFA: Net foreign assets.
• NEW: Net external wealth.
• NFL: Minus net foreign liabilities.
• NIIP: Net international investment position.
• W = KH + KA + HF (stocks): This formula defines wealth(W) as the sum of financial assets holdings (KH + KA).
• A N, = A (LHF+z HF) (flows): This formula is defining new external wealth.

Balance of Payments

• CA + KA = FA (new version): Current account plus Capital account equals Financial account.
• CA + KA + FA = 0 (old version): Same as above for balance of payments.
• Exports of goods: A positive component in the balance of payments.
• Pay off loans: A negative component in the balance of payments.
• Salaries from abroad: A positive component in the balance of payments.
• Spain forgives foreign debt: A positive component in the balance of payments.

BoP Components (published BoP)

• CA:

  • Goods
  • Services
  • Primary income (from work and investments)
  • Secondary income
  • Capital transfers

• KA:

  • Capital transfers
  • NP and NF assets

• TB - Trade balance

• NFIA - Net factor income abroad

• NLIA - Net labour

• NKIA - Net capital

• NUT - Net unilateral transfers.

Financial Account (FA) Components

• Direct investment(DIB)

• Portfolio investment (PIB)

  • Shares
  • Bonds

• Other investment

  • Trade credit
  • Loans
  • Money

• Official reserves

CA and NIIP

• CA + KA + = FAE (KAÑO): Formula for current and capital account related to financial account
• HF = ZH + ZF + ZH*t: Equation used.

National Income Identity (NIA)

• Y = C + I + G + CA: National income equals consumption, investment, government spending, plus the current account.

Durable Goods

• Export of a car: Expands over time, then stabilizes.

• New car: Starts high then decreases rapidly.

• Second-hand car: Starts low then increases over the long term

Bretton Woods Conference (1944)

• Harry Dexter White (USA): Key figure.
• John Maynard Keynes (UK): Another key figure.
• New institutions Creation of international financial institutions
• IMF (International Monetary Fund): Helps with balance of payments problems and establishment of greater stability.
• World Bank: Facilitates greater stability.

Exchange Rate Regimes

• Gold standard: Dominant regime from 1870-1913.
• World War I, World War II: Suspended the gold standard to address crises.
• Pegging to U.S. dollar: Dominated in 1970s.

Analytical BoP and National Income Identities

• Y = C + I + G + CA = YE + CA National income identities.
• YP = C + I + G + TB = YE + TB Different national income identity

Sale of a House (H → F) - BoP

• Seller (H): Transfers a house to a buyer (F).
• Buyer (F): Receives a house from the seller (H).
• FDI (Direct Investment): Implied in transaction.

Current Account

• CA + KA = FA: Current account, capital account, and financial account relationships.
• Asset and liabilities: Assets and liabilities considerations for accounts.

Intertemporal Approach to the CA

• CA: CA = Y – (c+i+a) or CA:= Y – (c+i+g) = YE = 0.

Theoretical assumptions

• identities: Hold always
• definitions: Hold always
• stock-flow equations: Hold always

Mathematics and Economics

• Mathematics: Sets of equations, variables (unknown, fixed).
• Economics: Model, variables (endogenous, exogenous), Equilibrium.

Comparative Statics

• Find initial equilibrium: Initial economic conditions.
• Change one or more exogenous variables: A critical change in an economic assumption.
• Find new equilibrium: Economic conditions following change.
• Compare both equilibria: Evaluate how the change made a difference.

Other Topics

• Optimization methods.
• Analysis of exchange rates, determination of exchange rates.
• Money growth rates, inflation, exchange rates.
• Exchange rate regimes and how they relate to hyperinflation situations.
• Comparison of basic and monetary model
• Currency flow models and analysis of accounting for exchange rates.
• Purchasing power parity models.

Test your knowledge on key concepts related to the balance of payments, including the Current Account and relevant equations such as NIIP and NFA. This quiz covers various components that contribute to the overall balance of payments structure. Challenge yourself with questions on definitions and components of the Current Account.