Balance of Payments
Overview of balance of payments
- Created by: Aimen Kamran
- Created on: 30-05-13 14:20
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- The balance of payments (BoP)
- Measures all currency flows in/out of econ in a given time period
- Capital account (Cpa)
- BoP Equilibrium
- Occurs when Ca more or less balances over few years
- Balancing item needed to cover 'mistakes' so sheet sums to 0
- Occurs when Ca more or less balances over few years
- Is a deficit a problem?
- Long run?
- YES
- Long run?
- Current account (Ca)
- The balance of payments (BoP)
- Measures all currency flows in/out of econ in a given time period
- Capital account (Cpa)
- BoP Equilibrium
- Occurs when Ca more or less balances over few years
- Balancing item needed to cover 'mistakes' so sheet sums to 0
- Occurs when Ca more or less balances over few years
- Is a deficit a problem?
- Long run?
- YES
- Long run?
- Capital flows generate inward Iy
- The balance of payments (BoP)
- Policies to cure BoP deficit
- Marshall-Lerner condition
- J-curve
- Is a surplus a problem?
- Policies to cure BoP surplus
- Is a surplus a problem?
- One country's surplus is another country's deficiit
- Is a surplus a problem?
- Measures income currency flows, payments for X and M
- Current account (Ca)
- Capital flows generate inward Iy
- Net income flows
- Investment income (profit and interest income generated from a country's assets abroad) (Iy)
- Current account (Ca)
- Transfers are payments such as aid/gifts
- Measures income currency flows, payments for X and M
- Net income flows
- Investment income (profit and interest income generated from a country's assets abroad) (Iy)
- Net income flows
- Measures income currency flows, payments for X and M
- LT capital flows
- ST capital flows
- Direct overseas investment (firms invest in/buy real prod assets)
- LT capital flows
- LT capital flows
- Portfolio overseas investment (purchase of foreign FA
- Hot money (speculative capital flows occurring when banks or individuals buy a currency in order to earn a higher r/i or when they expect an exchange rate to rise
- ST capital flows
- ST capital flows
- Short run?
- Nah
- Exchange rate
- Fixed
- Exchange rate
- Exchange rate
- Floating
- Problem because rate doesn't act as automatic stabiliser
- Fixed
- Fixed
- X automatically cheaper than M so Ca deficit somewhat managed
- Floating
- Floating
- 3 D's
- Policies to cure BoP deficit
- Policies to cure BoP deficit
- Deflation (reduce AD)
- 3 D's
- 3 D's
- Direct controls (protectionism)
- Devaluation of currency
- Expenditure-switching
- Direct controls (protectionism)
- Direct controls (protectionism)
- Expenditure-switching
- Expenditure-reducing
- Deflation (reduce AD)
- Deflation (reduce AD)
- Expenditure-switching
- maps possible time path of Ca following devaluation
- J-curve
- J-curve
- Shows that after devaluation due to human behavior there is a time lag before MPC changes so no immediate effect
- maps possible time path of Ca following devaluation
- In the SR the Ca deficit actually worsens
- maps possible time path of Ca following devaluation
- when sum of X and M PED >1 then devaluation has effect on Ca deficit. Otherwise may worsen.
- Marshall-Lerner condition
- Marshall-Lerner condition
- Reverse of 3D's
- Policies to cure BoP surplus
- One country's surplus is another country's deficiit
- Policies to cure BoP surplus
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