ECON 5335 Chapter 16

A country's current account balance

- is approximately equal to the difference between the value of the country's domestic production of goods and services and the country's expenditures on goods and services. - is approximately equal to the difference between the country's national saving and its domestic real investment. - equals the country's net foreign investment.

For a country to reduce its current account deficit, the country also must:

- reduce its net foreign borrowing. - increase its national saving (relative to its domestic real investment). - reduce its national expenditure on goods and services (relative to its domestic production of goods and services).

Which of the following capital transaction items is entered as a debit in the U.S. balance of payments?

A Spanish resident transfers the equivalent of $100 from his account at Bank America in Chicago to his Credit Suisse account in Basel (Switzerland).

The _____ is the statement that shows the amounts of a country's foreign assets and foreign liabilities at a point in time.

international investment position

If a country's net foreign investment is positive, that country

is acting as a net lender to the rest of the world.

For the United States, _____ include(s) financial assets denominated in euros and Japanese yen.

official international reserves

A country's _____ is the country's current account balance plus its (non-official) financial account balance.

official settlements balance

_____ is any flow of lending to or purchase of an ownership interest in a foreign entity that is controlled by the domestic entity which makes the loan or purchases the interest in the foreign entity.

Direct investment

If an Italian investor sells U.S. government securities to a U.S. buyer, how will this item be entered in the balance of payments?

It will appear in the financial account as a decrease in the U.S. assets held by foreigners.

Which of the following statements about the United States' role as a creditor is NOT correct?

Most foreign assets held by the United States are official reserve assets.

_____ are money-like assets held by a government that are recognized by other governments as fully acceptable for payments between governments.

Official international reserves

The set of accounts recording all of the flows of value between a nation's residents and the residents of the rest of the world during a specific period of time is called the

balance of payments.

If a country has _____, the country's foreign liabilities are growing faster than its foreign assets.

a current account deficit

Balance-of-payments accounting is based on the concept that every transaction between a country and other countries of the world involves

an exchange of value for value.

A country's _____ reflects all of its exports and imports of goods and services, its income receipts and income payments, and its gifts.

current account

The three broad categories that make up a country's balance of payments are the

current account, the financial account, and the changes in official international reserves.

If an item in an international transaction results in a resident of a foreign country getting a monetary claim against a resident of the United States, then in the U.S. balance of payments that item is a(n)

debit item (or subtraction).

When a resident of Russia increases her holdings of a U.S. financial asset, the

financial account of the U.S. balance of payments will be credited.

Importation of goods into a country, purchases by firms in a country of services from firms outside the country, and purchases by investors in a country of equity interests in a corporation outside of the country are all examples of

funds flowing out of the importing or purchasing country.

The flows of earnings on foreign assets are reported in a country's current account, whereas the principal amounts of (non-official) financial assets traded between a country's residents and the rest of the world are

reported in the country's (non-official) financial account.

The sum of the debit items in the balance of payments equals the

sum of all credit items.

The U.S. current account does not include

the sale of U.S. bonds to foreign interests.

A country's goods and services balance measures the country's net exports and is often called the country's

trade balance.

In the context of a country's balance of payments, unilateral transfers arise from

transactions for which there are no offsetting transfers of value, such as gifts.

If we add up all of the value outflows and value inflows in a country's balance of payments, the difference in the outflows and inflows will be

zero because there is value that flows out and value that flows in for every transaction.