Balance of payments

The balance of payments account	•       Balance of payments account is a record of the value of all transactions between residents of one country, with the residents of all other countries in the world over a given time period (usually one year).
The current account	•       The current account is a measure of the flow of funds from trade in goods/services (plus other  income flows). It is sub-divided into three parts: 1.       Balance of trade in goods 2.        Balance of trade in services 3.       Net income flows
Balance of trade in goods	•       Also called- visible trade balance, merchandise account balance or balance of trade •       It is a measure of the revenue received from the exports of tangible (physical) goods, minus the expenditure on the imports of tangible goods, over a given time period. •       Examples- trade in airplanes or chickens (something you can touch!)
The balance of trade in services	•       Also called the invisible trade balance, service balance or net services. •       It is a measure of the revenue received from the exports of services, minus, the expenditure on the imports of services over a given time period. •       Examples: banking, insurance, tourism
Income	Net investment incomes (net factor income from abroad)- a measure of the net monetary movement of profit, interest and dividends moving into and out of the country over a given period of time. It is a result of financial investment abroad.
Current transfers	•       Also called the invisible trade balance, service balance or net services. •       It is a measure of the revenue received from the exports of services, minus, the expenditure on the imports of services over a given time period. •       Examples: banking, insurance, tourism
The capital account	•       The capital account is a measure of the buying and selling of assets between countries. •       Examples- land, real estate, firms
The financial account	Direct investments- a measure of the purchase of long term assst where the purchaser is aimoing to gain long lasting interst Portfolio Investment- investment in stocks/shares, currency transactions and bank and savings account deposits Reserve assets- In the context of BOP and international monetary systems, the reserve asset is the currency or other store of value that is primarily used by nations for their foreign reserves.[
Consequences	The existence of a deficit or surplus in either the current or capital account result in economic consequences. Foreign exchange reserves may be used to increase the capital account & regain the balance. A country can’t do this forever, eventually the reserves will run out… In some case,s a high level of buying assets for ownership is financing the current account deficit; this could be based on foreign confidence in the domestic economy and is not a bad thing. BUT if foreign ownership of domestic assets is too great, economic sovereignty could be at stake. Plus if there is a “drop” in confidence, foreigners might sell the assets, increasing the supply of the currency making its value fall. It may be the current account deficit is financed by high levels of lending from abroad. If this is the case then high levels of interest must be paid. In the short-term, this could drain the economy and further increase the current account deficit in  the future. Also, the danger exists that lenders could withdraw their money, leading to massive selling of the currency and a sharp decline in the exchange rate. •       A capital account surplus is mainly positive, as it allows a current account deficit. •       BUT a capital account surplus based on high levels of borrowing from abroad is not good. –      High interest payments may drain the economy for years and if the lender withdraws its money could cause a sharp decline in the exchange rate.
Methods of correcting a persistent current account deficit	Expenditure-switching policies-Policies that attempt to switch the spending of domestic consumers away from imports and toward domestically produced goods/services. When successful, spending on imports falls and the current account deficit improves Examples- policies to depreciate/devalue the currency or protectionist measures Expenditure-reducing policies-Policies that attempt to reduce overall spending in the economy, shifting the AD curve left. When this occurs spending on all goods/services decreases (including spending on imports) The size of the fall in imports will depend on the marginal propensity to import Examples- Deflationary fiscal policies (increase taxes or decrease G [government spending] OR deflationary monetary policies (increase interest rate OR reduce the money supply)
Marshal lerner condioton	Introduction- In theory, when a country’s currency depreciates or is devalued there will be an increase in exports and a decrease in imports. AND that should improve a country’s current account deficit. BUT this is not always the case. B/C the effect of a price change (even a currency price change) depends on Price Elasticity of Demand (for imports or exports)
The J curve	If a government is facing a current account deficit, it may reduce the exchange rate of its currency in order to make exports relatively less expensive and imports relatively more expensive. If this happens AND the Marshall-Lerner condition is satisfied, PEDexports + PEDimports >1, then we can expect an improvement in the current account deficit. But in the short-run this is not always the case and the current account deficit actually gets worse before it gets better. This is called the J-curve effect