Definitions and Diagrams: International Economics

December 13, 2010 § Leave a comment

Balance of Payments: Record of the value of all the transactions between the residents of a country with residents of all other countries in a given time period

Balance of trade: Measure of revenue received from exports minus the expenditure on imports, over a given time period.

Current account: Measure of the flows of fund from trade in goods and services, net investment income flows, and net transfers of money

Capital account: Measure of the buying and selling of assets between countries. The assets are often separated to show assets that represent ownership and assets that represent lending

Current Account Surplus: Revenue from the exports and income flow is greater than the expenditure on the imports of goods/services and income flows over a given time period. More investment funds flowing into the country than out due to the fund on current account of BOP (balance of payments)

Current Account Deficit: Revenue of trade is less than the expenditure on the imports of goods/services and income flows over a given time period. Net outflow of investment.

Expenditure switching Policies: Governmental policies that attempt to switch the expenditure of domestic consumers away from imports.

Appreciation: When a currency increases its value on the exchange market.

Depreciation: When a currency decreases its value on the exchange market.

Expenditure-switching policies – these are policies that are aimed at encouraging people to switch their spending from imported goods to domestic goods. These policies might include tariffs and protectionism in general, manipulation of exchange rates to change the relative prices of imports and supply-side policies aimed at improving the competitiveness of national firms. If these policies are successful, spending will switch from imports to domestic spending and the current account will improve.

Expenditure-reducing policies – these are policies that aim to reduce domestic expenditure and therefore reduce the level of imports. The main expenditure-reducing policies are deflationary monetary and fiscal policies. These may include increasing tax, cutting government expenditure or increasing interest rates. The impact of these policies would be to reduce the level of aggregate demand and therefore the demand for imports. Lower income levels mean lower spending on imports and a consequent improvement in the current account. The extent of this improvement will depend on the income elasticity of demand for imports. The higher the income elasticity, the greater the improvement there will be in the current account

 

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