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Chapter 9

The document discusses the balance of payments, including definitions of the current account, financial account, and capital account. It provides formulas to calculate the current account balance, financial account balance, and statistical discrepancy. It also explains scenarios that can cause a current account deficit.

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11 views3 pages

Chapter 9

The document discusses the balance of payments, including definitions of the current account, financial account, and capital account. It provides formulas to calculate the current account balance, financial account balance, and statistical discrepancy. It also explains scenarios that can cause a current account deficit.

Uploaded by

anhthu11112002
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Chapter 9: Trade and the Balance of Payments

Class Notes: these count for 1% of your total grade

1. Definitions
Current Account: The current account deals with a country’s short-term transactions or the difference
between its savings and investments. It consists of trade in goods, services, investment incomes, and
current transfers
Financial Account: The financial account records the net change of assets and liabilities during a certain
period of time. It measures capital flows such as long-term investment in building a factory or financial
flows such as buying bonds or depositing money in bank accounts
Capital Account: The capital account is a small part of the balance of payments that records transactions
involving the transfer of ownership of fixed assets, such as land or buildings, or the acquisition or
disposal of non-produced, non-financial assets, such as patents or trademarks.
Current Account Balance: The current account balance is the sum of the balance of trade (exports minus
imports), net income from abroad, and net current transfers. A positive balance means the country has a
current account surplus, while a negative balance means it has a current account deficit
Trade Deficit: A trade deficit occurs when a country imports more goods and services than it exports. It is
also called a negative balance of trade. A trade deficit means the country is spending more foreign
currency than it is earning
Trade Surplus: A trade surplus occurs when a country exports more goods and services than it imports. It
is also called a positive balance of trade. A trade surplus means the country is earning more foreign
currency than it is spending
Statistical Discrepancy: A statistical discrepancy is the difference between the recorded debits and credits
in the balance of payments. It is also called the net errors and omissions. It reflects the inaccuracies or
incompleteness of the data sources and methods used to compile the balance of payments

2. Provide the correct order to find the current account balance (i.e. goods exports + services
exports – goods…)

To find the current account balance, you need to follow this formula:

Current Account Balance=(Exports−Imports)+Net Income+Net Transfers

where:

 Exports and Imports are the values of goods and services traded with other countries.
 Net Income is the difference between earnings on investments abroad and earnings by foreign
investors in the domestic country.
 Net Transfers are the net amount of foreign aid, remittances, grants, and pensions received or paid
by the country.
3. When is a country in a current account surplus?
A country is in a current account surplus when its exports of goods and services exceed its imports. This
means that the country has a positive balance of payments and is a net lender to the rest of the world. A
current account surplus can be caused by various factors, such as depreciation of exchange rate, trade
policies, or economic conditions. A current account surplus can have positive and negative effects on the
country’s economy, such as boosting domestic employment, increasing foreign assets, or creating upward
pressure on the currency value.

4. Provide the correct order to determine the financial account balance


To determine the financial account balance, you need to follow this formula:
Financial Account Balance=Net Change in Foreign Assets−Net Change in Domestic Assets
where:
Net Change in Foreign Assets is the difference between the value of foreign assets acquired by domestic
residents and the value of domestic assets sold to foreign residents.
Net Change in Domestic Assets is the difference between the value of domestic assets acquired by foreign
residents and the value of foreign assets sold to domestic residents.

5. Provide the formula to determine the statistical discrepancy


The statistical discrepancy is the difference between the recorded debits and credits in the balance of
payments. It reflects the inaccuracies or incompleteness of the data sources and methods used to compile
the balance of payments1. The formula to determine the statistical discrepancy is:
Statistical Discrepancy=Current Account Balance+Capital Account Balance+Financial Account Balance
where:
Current Account Balance is the sum of the balance of trade, net income from abroad, and net current
transfers.
Capital Account Balance is the net change of ownership of fixed assets and non-produced, non-financial
assets.
Financial Account Balance is the net change of assets and liabilities during a certain period of time.

6. Using savings, investment, taxes and government expenditures, provide a formula to show how to
calculate the current account balance.
The current account balance (CAB) is a component of the balance of payments, which records the
transactions between a country and the rest of the world. The CAB measures the net inflow and outflow
of goods, services, income, and transfers.
One way to calculate the CAB is by using the following formula:
CAB=Savings−Investment+Net Taxes−Government Expenditures
This formula is based on the national income identity, which states that the total output of a country
(GDP) is equal to the total expenditure. Therefore, we can rearrange the terms as follows:
GDP=Consumption+Investment+Government Expenditures+Net Exports
GDP−Consumption−Net Taxes=Savings+Net Exports
Savings−Investment=Net Exports+Net Taxes−Government Expenditures
CAB=Net Exports+Net Income+Net Transfers
The formula shows that the CAB depends on the difference between savings and investment, as well as
the fiscal policy of the government. A positive CAB means that the country is a net lender to the rest of
the world, while a negative CAB means that the country is a net borrower.

7. What scenarios arise to cause the current account to be in a deficit?


A current account deficit occurs when a country imports more than it exports. Some possible scenarios
that can cause a current account deficit are:
The country has an overvalued exchange rate, which makes its exports more expensive and its imports
cheaper.
The country has high economic growth, which increases the demand for imported goods and services.
The country has a decline in competitiveness or export sector, which reduces its ability to produce and
sell goods and services abroad.
The country has higher inflation than its trading partners, which erodes its purchasing power and makes
its exports less attractive.
The country faces a recession in other countries, which reduces the demand for its exports.
The country borrows money from abroad to finance its investments or consumption.

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