4.8.1 Balance Of Payments

An in-depth overview of the balance of payments, including its core components: the current account and the capital and financial account, and their impact on economic transactions between a country and the rest of the world.

4.8.1 Balance Of Payments

The Balance Of Payments

The balance of payments is a comprehensive statement detailing a country’s economic transactions with the rest of the world over a stated period, typically a quarter or a year. Its main elements include the current account and the capital and financial account.

Current Account

The current account summarizes the import and export of goods and services between residents and non-residents, including net transfers such as foreign aid. It serves as an indicator of trade balance and is sometimes referred to as the


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## What are the two main components of the balance of payments? - [x] Current account and the capital and financial account - [ ] Government spending account and savings account - [ ] Investment account and trade account - [ ] Import account and export account > **Explanation:** The balance of payments statement consists of two main components: the current account, which records imports and exports of goods and services, and the capital and financial account, which records financial flows related to investments. ## What does the current account record? - [x] The import and export of goods and services and net transfers - [ ] Foreign direct investment and portfolio investment - [ ] Government budget deficit - [ ] Inflation rate changes > **Explanation:** The current account records the import and export of goods and services between residents and non-residents, as well as net transfers like foreign aid. ## What does the capital and financial account record? - [ ] Daily transactions in stock markets - [x] Financial flows related to investments by foreigners in Canada and Canadians abroad - [ ] Government tax revenues - [ ] Household savings > **Explanation:** The capital and financial account records financial flows related to investments by foreigners in Canada and by Canadians abroad. ## What creates a demand for foreign currency according to balance of payments transactions? - [ ] Only foreign investments in Canada - [ ] Canadian dollar appreciation - [x] Current account outflows such as buying foreign goods or paying interest on debt - [ ] Increase in Canadian exports > **Explanation:** Current account outflows create a demand for foreign currency when, for example, Canadians buy foreign goods or pay interest on foreign-held debt. ## What leads to a current account deficit? - [x] A country buying more goods and services from abroad than it sells - [ ] A country exporting more than it imports - [ ] Increase in foreign investments in the country - [ ] Decrease in government spending > **Explanation:** A current account deficit occurs when a country imports more goods and services than it exports. ## How can a current account deficit be financed? - [ ] By only saving more money - [ ] By increasing tax revenues - [x] By selling more assets or borrowing money to make up the difference - [ ] By reducing government budgets > **Explanation:** A current account deficit can be financed by selling assets or borrowing money. ## What analogy is used to explain the balance of payments? - [ ] A household's monthly grocery shopping - [ ] A country’s military spending - [x] Making up the difference by borrowing money or selling something of value when spending more than earning - [ ] A business expanding its operations > **Explanation:** The balance of payments is explained by the analogy of spending more than earning, and making up the difference by borrowing money or selling something of value. ## What does running a capital and financial account surplus suggest? - [ ] A decrease in foreign investments into the country - [ ] An increase in the country's currency value - [ ] A reduction in debt levels - [x] Selling more assets or receiving more investments than what is spent abroad > **Explanation:** Running a capital and financial account surplus suggests selling more assets or receiving more investments than what is spent abroad to finance a current account deficit. ## Which of the following is sometimes called the trade account? - [ ] Capital and financial account - [x] Current account - [ ] Government account - [ ] National savings account > **Explanation:** The current account is sometimes referred to as the trade account, as it records the import and export of goods and services. ## How do balance of payments transactions affect currency exchange? - [ ] They have no effect on currency exchange rates. - [x] They create a supply or demand for foreign currency and for the country’s currency. - [ ] They stabilize foreign currency exchange rates. - [ ] They determine the country's interest rates. > **Explanation:** Balance of payments transactions involve a supply or demand for foreign currency and for the Canadian currency, affecting exchange rates.

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