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CHAPTER 10: PRICE ADJUSTMENT MECHANISM WITH FIXED AND FLEXIBLE EXCHANGE…
CHAPTER 10: PRICE ADJUSTMENT MECHANISM WITH FIXED AND FLEXIBLE EXCHANGE RATE
BALANCE OF TRADE
BOT records the volume of goods and services imported as well as exported by a country to other country
Records which keep a tracks of trade between two countries
ASPECT OF BOT
NEGATIVE
country have to pay lot of money because they are in the receiving end
if country receive more than providing, the cost will be more than revenue
POSITIVE
if country export more than import, balance of trade will be positive
Many tourists come to the country to spend money in hotel or some restaurant. this represent exporting the services
Current account tracks the difference between a country's total exports and total imports (including goods, services and transfers)
COMPONENT OF BALANCE OF PAYMENTS
WHAT IS BOP: a record of all the economic transactions between a country and the rest of the world
CURRENT ACCOUNT
NET PRIMARY INCOME
NET SECONDARY INCOME
BALANCE ON GOODS AND SERVICES
CA calculated as: net goods + net services (BOGS) + net primary income + net secondary income
CAPITAL AND FINANCIAL ACCOUNT
CAPITAL ACCOUNT
purchase and sale of non-financial assets
capital transfers (debt forgiveness)
FINANCIAL ACCOUNT
shows transactions in foreign financial assets and liabilities
includes all the inflows and outflows of investment and foreign debt in that country
KAFA calculated as: capital account + financial account
Country imports more than export, in that situation it is a trade deficit
When country export more than import, in that situation it is a trade surplus
Financial capital account tracks the ownership of assets held by foreigners and ownership of foreign assets.
positive net capital outflow means that a country invests outside more than other countries invest inside it.
if a country has a current account deficit, they will have a capital account surplus because their net capital outflow is negative.