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The balance of payments
UNIT 4…read more

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Key terms
Balance of payments
· Measures all the currency flows into and out of an
economy in a given time period
Current account
· The part of the balance of payments measuring
income currency flows, especially payments for
exports and imports
· Payments flowing between countries in forms
such as foreign aid, grants and gifts…read more

Slide 3

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Investment income
· Profit and interest income flowing into a country that
is generated from assets the residents of the country
own abroad
Direct overseas investment
· Occurs when firms invest in or buy real productive
assets located in foreign countries
Portfolio overseas investment
· Occurs when financial services firms buy financial
assets such as shares and government bonds issued in
foreign countries…read more

Slide 4

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Speculative capital flows
· Occur when companies, banks and rich
individuals buy a currency in order to earn
higher interest rates on bank deposits held in
that currency
Balance of payments equilibrium
· Occurs when the current account more or less
balances over a period of years…read more

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Deflationary policy
· Involves contractionary monetary or fiscal policy that
shifts the AD curve to the left
· Is a fall in the currency's exchange rate brought about
by a government and central bank (formal) OR
downward float/depreciation (informal) of the
exchange rate
· Curve shaped like the letter J to map the possible time
path of the state of the current account following a
devaluation…read more

Slide 6

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What is the balance of payments?
· Part of the national accounts
· Attempts to measure all the currency flows
into and out of the country in a particular time
· Only an estimate of currency flows ­ activities
like smuggling, money laundering and late
recording of data/inaccurate data mean that
there are always errors…read more

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