How does a U.S. company exporting goods to Europe affect the U.S. Balance of Payments?
It is a positive entry in the current account, specifically in net exports.
How does a foreign investor purchasing U.S. Treasury bonds affect the U.S. Balance of Payments?
It is a positive entry in the capital account, as foreign money flows into the U.S.
How does a U.S. citizen buying stock in a foreign company affect the U.S. Balance of Payments?
It is a negative entry in the capital account, as U.S. money flows out of the country.
If a country has a large trade deficit, what does this imply about its current account?
It implies that the country likely has a current account deficit, assuming other components of the current account do not offset the trade deficit.
How does an increase in foreign aid given by the U.S. affect the current account?
It is recorded as a negative entry in the net transfers section of the current account.
How does the Fed use official reserves to manage a balance of payments deficit?
The Fed uses its official reserves to cover the deficit, decreasing the reserves.
How does the circular flow of dollars relate to the balance of payments?
Dollars sent abroad for imports eventually return through purchases of goods/services or assets, balancing the BOP.
How does a trade surplus impact a country's currency value?
It tends to increase the demand for the country's currency, potentially leading to appreciation.
How does an increase in domestic interest rates affect the capital account?
It can attract foreign investment, leading to a capital account surplus.
How does a government's decision to purchase foreign currency affect the official reserves account?
It increases the official reserves account balance.
What is the Balance of Payments (BOP)?
A record of all international transactions in a year.
What is the Current Account?
Tracks the flow of goods, services, and income.
What is the Capital Account?
Tracks the flow of investments (assets).
What are Net Exports?
The value of a country's exports minus the value of its imports.
What is a Trade Surplus?
When a country's exports are greater than its imports.
What is a Trade Deficit?
When a country's imports are greater than its exports.
What is Net Investment Income?
Interest and dividends paid to or from domestic investors.
What are Net Transfers?
Aid, grants, and other transfers of income.
What is the Official Reserves Account?
An account holding foreign currency reserves controlled by a central bank.
What is financial investment in the capital account?
The purchase of financial assets like stocks and bonds.
What are the differences between the current account and the capital account?
The current account tracks goods, services, and income, while the capital account tracks investments in assets.
What are the key differences between a trade surplus and a trade deficit?
A trade surplus occurs when exports exceed imports; a trade deficit occurs when imports exceed exports.
What are the differences between financial investments and real investments in the capital account?
Financial investments involve the purchase of stocks and bonds, while real investments involve the purchase of land and businesses.
What is the difference between a debit and a credit in the balance of payments?
A credit represents money flowing into the country, while a debit represents money flowing out.
Differentiate between net investment income and net transfers in the current account.
Net investment income involves interest and dividends, whereas net transfers involve aid and grants.
What is the difference between the capital account and the official reserves account?
The capital account tracks investments, while the official reserves account is used by the central bank to balance payments.
What is the difference between exports and imports?
Exports are goods and services sold to other countries, while imports are goods and services bought from other countries.
What is the difference between a current account surplus and a capital account surplus?
A current account surplus means a country is exporting more than it imports, while a capital account surplus means more foreign investment is flowing in than domestic investment flowing out.
What is the difference between direct investment and portfolio investment?
Direct investment involves controlling ownership in a business, while portfolio investment involves passive ownership of stocks and bonds.
What is the difference between unilateral transfers and investment income?
Unilateral transfers are one-way payments like foreign aid, while investment income is earned from investments.
