ECON10003 Chapter Notes - Chapter 16: Capital Account, Net Income, Property Income

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orangemole587

25 May 2018

School

University of Melbourne

Department

Economics

Course

ECON10003

Professor

Nahid Khan, Lawrence Uren

For unlimited access to Textbook Notes, a Class+ subscription is required.

The balance of payments is a record of all transactions between the residents of one country and the

residents of all other countries

The current account records transactions leading to a change of ownership of commodities or a

direct flow of income or similar payment

The capital account records transactions leading to either the purchase or sale of domestic assets

Measure free on board (f.o.b.), meaning that any freight and insurance charges are

assumed to be incurred by the country purchasing the commodities

○

ve indicates imports > exports

○

Balance of merchandise trade = difference between exports and imports

Freight, insurance and other charges associated with buying and selling commodities

○

Net services = difference between what the domestic country spends on services in other

countries and what foreign residents spend on services domestically

Direct income payments, eg. interest, dividend and royalty payments

○

Labour and property income

○

Net income

Funds brought in by newly arrived migrants

○

Foreign aid

○

Current transfers = one

off transactions in the current account

The current account:

ve means a current account deficit

+ve means a current account surplus

Balance on the current account = balance on merchandise trade + net services + net income +

current transfers

Capital transfers

The capital account:

The balance of payments

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Capital inflows are when financial capital flows into a country as the result of a sale of a

domestic asset

Capital outflows are when financial capital flows out of a country as the result of a purchase of

a foreign asset

Net capital inflows = capital inflows

capital outflows

International capital flows are flows of financial capital between countries as a result of the sale or

purchase of one country's assets by other countries

International capital flows allow countries whose productive investment opportunities are greater

than domestic saving to fill in the gap by borrowing from abroad

CAB = current account balance

KAB = capital account balance

Holds only the country has a flexible exchange rate

CAB + KAB = 0

CHFOREX = change in the value of the central bank's holdings of foreign currency

An undervalued exchange rate has CAB + KAB > 0

An overvalued exchange rate has CAB + KAB < 0

CAB + KAB = CHFOREX

Capital flows and the relationship between the capital and

the current accounts

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Document Summary

The (cid:271)ala(cid:374)(cid:272)e of pa(cid:455)(cid:373)e(cid:374)ts is a re(cid:272)ord of all tra(cid:374)sa(cid:272)tio(cid:374)s (cid:271)et(cid:449)ee(cid:374) the reside(cid:374)ts of o(cid:374)e (cid:272)ou(cid:374)tr(cid:455) a(cid:374)d the reside(cid:374)ts of all other (cid:272)ou(cid:374)tries. The (cid:272)urre(cid:374)t a(cid:272)(cid:272)ou(cid:374)t re(cid:272)ords tra(cid:374)sa(cid:272)tio(cid:374)s leadi(cid:374)g to a (cid:272)ha(cid:374)ge of o(cid:449)(cid:374)ership of (cid:272)o(cid:373)(cid:373)odities or a dire(cid:272)t flo(cid:449) of i(cid:374)(cid:272)o(cid:373)e or si(cid:373)ilar pa(cid:455)(cid:373)e(cid:374)t. The (cid:272)apital a(cid:272)(cid:272)ou(cid:374)t re(cid:272)ords tra(cid:374)sa(cid:272)tio(cid:374)s leadi(cid:374)g to either the pur(cid:272)hase or sale of do(cid:373)esti(cid:272) assets. Bala(cid:374)(cid:272)e of (cid:373)er(cid:272)ha(cid:374)dise trade = differe(cid:374)(cid:272)e (cid:271)et(cid:449)ee(cid:374) e(cid:454)ports a(cid:374)d i(cid:373)ports. Measure free o(cid:374) (cid:271)oard (cid:894)f. o. (cid:271). (cid:895), (cid:373)ea(cid:374)i(cid:374)g that a(cid:374)(cid:455) freight a(cid:374)d i(cid:374)sura(cid:374)(cid:272)e (cid:272)harges are assu(cid:373)ed to (cid:271)e i(cid:374)(cid:272)urred (cid:271)(cid:455) the (cid:272)ou(cid:374)tr(cid:455) pur(cid:272)hasi(cid:374)g the (cid:272)o(cid:373)(cid:373)odities. Net ser(cid:448)i(cid:272)es = differe(cid:374)(cid:272)e (cid:271)et(cid:449)ee(cid:374) (cid:449)hat the do(cid:373)esti(cid:272) (cid:272)ou(cid:374)tr(cid:455) spe(cid:374)ds o(cid:374) ser(cid:448)i(cid:272)es i(cid:374) other (cid:272)ou(cid:374)tries a(cid:374)d (cid:449)hat foreig(cid:374) reside(cid:374)ts spe(cid:374)d o(cid:374) ser(cid:448)i(cid:272)es do(cid:373)esti(cid:272)all(cid:455) Freight, i(cid:374)sura(cid:374)(cid:272)e a(cid:374)d other (cid:272)harges asso(cid:272)iated (cid:449)ith (cid:271)u(cid:455)i(cid:374)g a(cid:374)d selli(cid:374)g (cid:272)o(cid:373)(cid:373)odities. Dire(cid:272)t i(cid:374)(cid:272)o(cid:373)e pa(cid:455)(cid:373)e(cid:374)ts, eg. i(cid:374)terest, di(cid:448)ide(cid:374)d a(cid:374)d ro(cid:455)alt(cid:455) pa(cid:455)(cid:373)e(cid:374)ts. Curre(cid:374)t tra(cid:374)sfers = o(cid:374)e-off tra(cid:374)sa(cid:272)tio(cid:374)s i(cid:374) the (cid:272)urre(cid:374)t a(cid:272)(cid:272)ou(cid:374)t.

Related Questions

In the short run, a tighter monetary policy by the U.S. Federal Reserve leads to:

Select one:

a. an increase in the supply of dollars and a dollar depreciation.

b. a decrease in the supply of dollars and a dollar appreciation.

c. an increase in the demand for dollars and a dollar depreciation.

d. a decrease in the demand for dollars and a dollar appreciation.

Which theorem states that exchange rates will adjust until the prices of goods in different countries approximate one another?

Select one:

a. purchasing power parity

b. the law of multiple prices

c. the principle of comparative advantage

d. dollarization

A country's balance of trade is the difference between its:

Select one:

a. nominal and real exchange rates.

b. monetary and fiscal policy.

c. exports and imports.

d. capital inflow and capital outflow.

When a foreign business buys stock in a U.S. company, the U.S. capital account will:

Select one:

a. move in a positive direction.

b. move in a negative direction.

c. remain unchanged.

d. become more volatile.

Saying that the United States is running a large current account deficit is equivalent to saying that:

Select one:

a. exports exceed imports in the United States.

b. the United States is running a large capital account surplus.

c. the balance of payments is negative.

d. the value of the current capital stock in the United States exceeds the value of future capital flows.

10-

An increase in the demand for a country's exports will have what effect on its currency?

Select one:

a. Its value will not change.

b. Its value will increase.

c. Its value will decrease.

d. Its value will depreciate.

11-

When the United States has a current account deficit, the U.S. capital account:

Select one:

a. will have a deficit also.

b. will be balanced.

c. will have a surplus.

d. must be falling.

12-

Which of the following is NOT a way that a country can finance a trade deficit?

Select one:

a. increased borrowing

b. sale of assets

c. decreased exports

d. reduction in cash reserves

13-

A trade deficit occurs when the value of a country's:

Select one:

a. imports exceeds the value of its exports.

b. exports exceeds the value of its imports.

c. inflow of foreign capital exceeds the outflow of domestic capital.

d. outflow of domestic capital exceeds its inflow of foreign capital.

14-

Which of the following is a U.S. current account transaction?

Select one:

a. Selling a computer chip to a resident in Europe.

b. Buying stock shares of a Canadian company.

c. Selling U.S. dollars in exchange for euros.

d. A foreign investor's purchase of a manufacturing plant in the United States.

15-

An exchange rate is:

Select one:

a. a yearly summary of all the economic transactions between residents of one country and residents of the rest of the world.

b. the sum of the balance of trade, net income on capital held abroad, and net transfer payments.

c. the price of one currency in terms of another currency.

d. a currency whose value is not pegged but governments will intervene extensively in the market to keep the value within a certain range.

amethysthedgehog627

QUESTION 1

If a real asset located in Brazil is sold to someone in the US, the transaction would result in a credit in Brazil's balance of payments.

True

False

6.25 points

QUESTION 2

The balance of payments for a given nation records

only imports and exports of good and servies

only foreign direct investment and portfolio investments between nations

both imports and exporst of good and servieces as well as forein direct investment and portolio investments between nations
QUESTION 36.25 points

Transactions between Canada and the rest of the world are shown below. Use the following information to answer the next four questions.

Canadian citizens receive C$5 million worth of dividends from foreign investments.

Imperial Oil (Canadian firm) invests C$60 million in overseas oil discovery.

Foreign tourists spend C$45 million in Canada.

Canadian government sells C$20 million worth of treasury securities to foreign nations.

Alcan (Canadian firm) sells C$8 million worth of aluminum to US companies.

Canadian government buys C$32 million worth of gold.

Canadian firm buys C$12 million worth of computer components from Sony.

Canada sends C$4 million in aid to Mexico.

Ford spends C$30 million in constructing an assembly plant in Canada.

Find Canada's balance of trade. Enter your final answer in terms of millions of dollars. Do not enter a non-numerical value when inputting your answer.

6.25 points

QUESTION 4

Find the capital account balance (in millions of C$).

		-39
		19
		70

6.25 points

QUESTION 5

Find Canada's current account balance. Enter your final answer in terms of millions of dollars. Do not enter a non-numerical value when inputting your answer.

6.25 points

QUESTION 6

Canada's capital account balance suggests that it is a net supplier of capital to the rest of the world.

True

False

6.25 points

QUESTION 7

Suppose a nation has a current account surplus. This surplus implies

		ation
		ation

		none of the above

6.25 points

QUESTION 8

Suppose that the value of the dollar moves from Â£=$1.5 to Â£=$1.75. What effect would this have on the UK's balance of trade, all else being equal?

		UK
		UK
		UK

6.25 points

QUESTION 9

There is an inverse relationship between the demand for US exports and the US inflation rate.

True

False

6.25 points

QUESTION 10

Transactions between Great Britian and the rest of the world are shown below. Use the following information to answer the next two questions.

British companies sell 50 million pounds worth of bonds to foreigners.

British government sells 20 million pounds of treasury securities to foreigners.

British citizens receive 2 million pounds in interest from foreign investments.

British companies buy 85 million pounds worth of American produced steel.

GlaxoSmithKline (British firm) sells 40 million pounds of pharmaceutical drugs abroad.

British government buys 15 million pounds of gold in FX market.

British bankers invest 12 million pounds in foreign banks.

Find Great Britian's balance of trade. Enter your answer in terms of millions of pounds. Do not use the pound sign or any other non-numerical value when inputting your answer.

and

Transactions between Great Britian and the rest of the world are shown below. Use the following information to answer the next two questions.

British companies sell 50 million pounds worth of bonds to foreigners.

British government sells 20 million pounds of treasury securities to foreigners.

British citizens receive 2 million pounds in interest from foreign investments.

British companies buy 85 million pounds worth of American produced steel.

GlaxoSmithKline (British firm) sells 40 million pounds of pharmaceutical drugs abroad.

British government buys 15 million pounds of gold in FX market.

British bankers invest 12 million pounds in foreign banks.

Find Great Britian's balance of trade. Enter your answer in terms of millions of pounds. Do not use the pound sign or any other non-numerical value when inputting your answer.

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ECON10003 Chapter Notes - Chapter 16: Capital Account, Net Income, Property Income

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