Finance Chapter 3

Front 1

Current Account

Back 1

Balance-of-payment entry representing the exports and imports of goods and services, and unilateral transfer

Front 2

Capital Account

Back 2

Balance-of-payment entry capturing all sales and purchases of financial assets (stocks, bonds, & bank accounts, real estate, and businesses

Front 3

Official reserve account

Back 3

covers all purchases and sales of international reserve assets such as dollars, foreign exchanges, gold, and special drawing rights (SDRs)

Front 4

Merchandise trade

Back 4

The 1st category of the current account; represents exports and imports of tangible goods, such as oil, wheat, clothes, automobiles, computers, etc.

Front 5

Trade balance

Back 5

represents the net merchandise export

Front 6

Services

Back 6

the 2nd category of the current account, include payments and receipts for legal, consulting, and engineering services, royalties for patents and intellectual properties, insurance premiums, shipping fees, and tourist expenditures. (these trades in services are sometimes called "invisible trade"

Front 7

Factor Income

Back 7

the 3rd category of the current account, consists largely of payments and receipts of interest, dividends, and other income on foreign investments that were previously made.

Front 8

Unilateral transfers

Back 8

the 4th category on the current account, involve "unrequited" payments. Examples include foreign aid, reparations, official and private grants, and gifts

Front 9

J-curve effect

Back 9

refers to the initial deterioration and eventual improvement of the trade balance following the depreciation of a country's currency

Front 10

Foreign Direct Investment (FDI)

Back 10

The 1st category of the capital account, Investment in a foreign country that gives the MNC a measure of control

Front 11

Portfolio Investment

Back 11

The 2nd category of the capital account, mostly representing sales and purchases of foreign financial assets such as stocks and bonds that do not involve a transfer of control. (Investors typically diversify their investment portfolios to reduce risk)

Front 12

Other investment

Back 12

The 3rd category of the capital account, which includes transactions in currency, bank deposits, trade credits, etc. These investments are quite sensitive to both changes in relative interest rates between countries and the anticipated change in the exchange rate

Front 13

Overall balance

Back 13

when we compute the cumulative balance of payments including the current account, capital account, and the statistical discrepancies, we obtain the so-called overall balance or official settlement balance

Front 14

Official reserve assets

Back 14

When a country must make a payment to foreigners because of a balance-of-payments deficit, the central bank of the country (the federal reserve system in the U.S.) should either run down its official reserve assets, such as gold, foreign exchanges, and SDRs, or borrow anew from foreign central banks

Front 15

Formula for the balance-of-payments accounts to be recorded correctly must equal zero. This is known as the balance-of-payments identity (BOPI)

Back 15

BCA + BKA + BRA = 0
Where:
BCA = balance on the current account
BKA = balance on the capital account
BRA = balance on the reserves account

Front 16

The balance on the reserves account (BRA) represents...

Back 16

the change in the official reserves

Front 17

Under the fixed exchange rate regime...

Back 17

BCA + BKA = - BRA

the combined balance on the current and capital accounts will be equal in size, but opposite in sign, to the change in the official reserves

Front 18

Under the pure flexible exchange rate regime...

Back 18

BCA = - BKA

In other words, a current account surplus or deficit must be matched by a capital account deficit or surplus, and vice versa