Question 1

What are net exports?

Accepted Answer

The difference in value between all exported goods/services and all imported goods/services

(exports > imports = surplus; exports < imports = deficit)

Question 2

What are net investments?

Accepted Answer

Any interest or dividend paid to or from domestic investors

Question 3

What are net transfers?

Accepted Answer

Any aid or grants paid to or from the domestic economy

(e.g., US gives foreign aid to Ukraine)

Question 4

What is the current account (CA)?

Accepted Answer

The value of a country's net exports, net income from abroad, and net unilateral transfers

Question 5

Is the CA always balanced?

Accepted Answer

No, the CA may show a surplus or a deficit

(US has a negative CA, mostly due to many more imports than exports; China has a positive CA)

Question 6

What does a nation's balance of trade measure?

Accepted Answer

The difference between its exports and imports of goods and services

Positive balance of trade (trade surplus): a country exports more than it imports (China)

Negative balance of trade (trade deficit): a country imports more than it exports (US)

Question 7

What are financial investments?

Accepted Answer

Purchasing foreign or domestic financial assets

(foreign purchase of domestic = positive; domestic purchase of foreign = negative)

(e.g., buying a bond of a foreign government's)

Question 8

What are real investments?

Accepted Answer

Purchasing foreign or domestic land and businesses (e.g., real estate, factories)

(see financial investments)

Question 9

What is the capital and financial account (CFA)?

Accepted Answer

A record of financial capital transfers and purchases and sales of real assets between countries

(foreign investment in real estate, government bonds, and various financial assets)

Question 10

Is the CFA always balanced?

Accepted Answer

No, the CFA may show a surplus (financial capital inflow) or a deficit (financial capital outflow)

(US has an inflow; Mexico has an outflow)

Question 11

What is the difference between a current account (CA) and a capital and financial account (CFA)?

Accepted Answer

A CA measures exports and imports of goods and services, while a CFA measures capital flows and investment

(CA also includes transfer payments, while the CFA includes asset purchases and sales)

Question 12

What is the balance of payments (BOP)?

Accepted Answer

An accounting system that records a country's international transactions for a particular time period

Consists of the CA and the CFA

Question 13

What are credits and debits for a BOP account?

Accepted Answer

Credit: any transaction that causes money to flow into a country

Debit: any transaction that causes money to flow out of a country

Question 14

What is the equation for the balance of payments?

Accepted Answer

CA + CFA = 0

The sum of all credit entries should match the sum of all debit entries

Question 15

Why does CA + CFA = 0?

Accepted Answer

When an economy imports goods, a foreign economy receives the domestic economy's currency. That currency has no use other than to be invested back into the domestic economy by the foreign economy

(e.g., US imports clothes from China -> China has USD -> China spends USD on US assets, such as real estate)

6.1 Balance of Payment Accounts, AP Macroeconomics Flashcards