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Balance of Payments

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1. Explain the economic meaning and usefulness of the following balance of payments concepts:
The balance of payments accounts is a record of all international transactions that are undertaken between residents of one country and residents of other countries during some period of time.

merchandise trade balance: a record of all international transactions for goods only. Goods include physical items like autos and appliances, etc.

net balance on goods and services measures the sum of the balance on merchandise trade and the balance on services. It is equal to its exports of goods and services less its imports of goods and services;

net balance on goods, services and net income measures the net transfer of merchandise plus services and income on direct and portfolio investment.

current account balance is the part of the balance of payments that includes international trade in currently produced goods and services.
current account balance = net balance on goods, services and net income + unilateral transfers

overall balance = current account balance + capital account balance
where capital account balance is transactions in financial assets and liabilities.

2. Is it correct to say that a current account deficit is bad for a nation? If so,
explain why. If not, give an example of how it might be good.

The existence of a current account deficit is not always bad for a nation. The current account deficit means that the country is importing capital. And importing capital is no more unnatural or dangerous ...

Solution Summary

Balance of Payments is emphasized.