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Learning Outcomes:
Outline the role of the balance of payments
Distinguish between debit items and credit items in the balance of payments.
Explain the four components of the current account, specifically the balance of trade in goods, the balance of trade in services, income and current transfers.
Distinguish between a current account deficit and a current account surplus.
Explain the two components of the capital account, specifically capital transfers and transactions in non-produced, non-financial assets.
Explain the three main components of the financial account, specifically, direct investment, portfolio investment and reserve assets.
HL Only: Calculate elements of the balance of payments from a set of data.
Explain that the current account balance is equal to the sum of the capital account and financial account balances.
Examine how the current account and the financial account are interdependent.
BoP Practice
BoP Practice
The End of the Chinese Economic Miracle Will China continue to have a current account surplus?
The End of the Chinese Economic Miracle Will China continue to have a current account surplus?
AND
AND
Current Account Deficits
Current Account Deficits
Goals for today:
Goals for today:
Current Account Deficits
Current Account Deficits
The relationship between the current account and the exchange rate
The relationship between the current account and the exchange rate
• Explain why a deficit in the current account of the balance of payments may result in downward pressure on the exchange rate of the currency.
• Explain why a deficit in the current account of the balance of payments may result in downward pressure on the exchange rate of the currency.
Current Account Surplus
Current Account Surplus
The relationship between the current account and the exchange rate
The relationship between the current account and the exchange rate
• Explain why a surplus in the current account of the balance of payments may result in upward pressure on the exchange rate of the currency.
• Explain why a surplus in the current account of the balance of payments may result in upward pressure on the exchange rate of the currency.
Welker's Review:
Why should the payments always be "balanced"?
Why should the payments always be "balanced"?
Expenditure Reducing and Expenditure Switching Policies:
Expenditure Reducing and Expenditure Switching Policies:
HL Content Requirements:
HL Content Requirements:
Discuss the implications of a persistent current account deficit, referring to factors including foreign ownership of domestic assets, exchange rates, interest rates, indebtedness, international credit ratings and demand management.
Explain the methods that a government can use to correct a persistent current account deficit, including expenditure-switching policies, expenditure reducing policies and supply-side policies, to increase competitiveness.
Evaluate the effectiveness of the policies to correct a persistent current account deficit.
State the Marshall-Lerner condition and apply it to explain the effects of depreciation/devaluation.
Explain the J-curve effect, with reference to the Marshall-Lerner condition
Discuss the possible consequences of a rising current account surplus, including lower domestic consumption and investment, as well as the appreciation of the domestic currency and reduced export competitiveness.
Homework: Finish reading and reviewing section on Balance of Payments in your book.
Homework: Finish reading and reviewing section on Balance of Payments in your book.
HL Homework: Watch the Marshall Lerner condition and J-curve lecture from Econ Plus Dal Below:
HL Homework: Watch the Marshall Lerner condition and J-curve lecture from Econ Plus Dal Below:
in groups of 2-3, read one article about balance of payments and relate to what you know.
in groups of 2-3, read one article about balance of payments and relate to what you know.
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