Flashcards on International Trade and Foreign Exchange
International Trade and Foreign Exchange: A Student's Guide
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Balance of Payments
45 cards
Card 1
Question: What is the balance of payments (BoP)?
Answer: A systematic record of all transactions between a country and the rest of the world over a specific period.
Card 2
Question: Name the policy the central bank can use to correct a current account deficit and how it works.
Answer: Contractionary monetary policy: the central bank raises interest rates, which reduces borrowing and consumer spending and lowers demand for imports.
Card 3
Question: How can the government use fiscal policy to help correct a current account deficit?
Answer: By using contractionary fiscal policy—reducing government spending and/or increasing taxes—lowering disposable income and consumption, which decreases
Card 4
Question: List trade policy tools a government can use to reduce imports.
Answer: Tariffs, quotas, and import permits.
Card 5
Question: Give two ways a government can encourage exports.
Answer: Provide export subsidies and negotiate trade agreements; promote and market local goods abroad.
Card 6
Question: What is import substitution and how does it affect the current account?
Answer: Import substitution is when local industries produce goods previously imported; it supports domestic firms, creates jobs, and reduces dependence on im
Card 7
Question: When might a country use foreign exchange reserves or borrowing to address a current account deficit, and what is the limitation of this approach?
Answer: They may use reserves or borrow from the IMF or other countries as a short-term solution to finance a deficit, but this is not a permanent solution; l
Card 8
Question: According to the example table, how do you calculate the balance on the current account (A)?
Answer: Add merchandise exports, net gold exports, services receipts, and income receipts, then subtract merchandise imports, payments for services, income pa
Card 9
Question: Using the example data, what is the balance on the current account (A)?
Answer: −35 222 million R (a current account deficit).
Card 10
Question: How is the trade balance (B) calculated in the example?
Answer: Trade balance = merchandise exports + net gold exports − merchandise imports.