Balance of Payments and International Economic Linkages

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Ch. 5 | Balance of Payments and International Economic Linkages

Balance of payments - accounting statement of the international transactions of one nation over a specific period of time (transactions between US residents and residents of all other countries during that year).

Divided in different components:
Current Account - purchases and sales of goods and services
Financial Account - capital transactions
Reserves Account - changes in official reserves

Debit entry - purchase of domestic goods, services, or assets, or a decline in liabilities to foreigners.

Credit Entry - sale of debit entry.

Double entry book keeping ensures that debits = credits (sum of all transactions = zero).

In the absence of official reserve transactions, financial account surplus must offset the current account deficit, vice versa.

US = running a large current account deficit (imports > exports) Reduce: domestic savings rise, private investment declines, govt deficit reduced Focus: unfair trading practices + or on the high value of the dollar Domestic spending balance = private savings investment balance - govt budget deficit
 National Income = Consumption + Savings
National Spending = Consumption + Investment
National Income - National Spending = Savings - Investment

J-curve theory, a country’s trade deficit worsens just after its currency depreciates because price effects will dominate the effect on volume of imports in the short run.

Protectionism–that is, the imposition of tariffs, quotas, or other forms of restraint against foreign imports.

A quota specifies the quantity of particular products that can be imported to a country, typically an amount that is much less than the amount currently being imported.

Ch. 6 | Foreign Exchange Market

FEM - transfer purchasing power denominated in one currency to another and facilitate international trade and investment.

Two Tiers - interbank market (major banks trade with each other) & retail market (banks...
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