Economics and Statistics

Current account deficit:  this will cause a currency depreciation, as the demand for imported goods is bigger than the foreign demand for exported goods.   This will make it easier for domestic producer to exports their goods as they, the goods, become relatively cheaper on the foreign market. A deficit in the balance of trade implies that the financial account must be positive (remember Xn= S-I). In order to pay for the imported goods, it must be the case that foreign entities own more domestic financial assets. Furthermore, foreign countries will buy domestic government debt. The central bank can try to offset inflation by raising the interest rate which can then attract foreign capital (i.e money). However, in the short term, this will be a monetary contractionary policy. Current account surplus: The domestic currency will appreciate, since foreign demand for exported goods is bigger than the domestic demand for imported goods. Note that domestic savings are then ...

Balance of payment is the sum of three separate accounts and must always be equal to 0 (given no statistical error): Current account: the net flow of funds exchanged for goods and services, and monetary gifts  that flow in and out of a country. This is often used as an indicator for net export. Financial account: also known as the capital account, is the net flow of funds for investment in real assets (direct investments) or financial assets (stocks or bonds) into a nation. Official reserves: in order to balance the two accounts above, a country must have a reserve of foreign money. It measures the net effect of all money flows from the other accounts. If the current account is positive, it must be the case that the sum of the financial account and official reserves is negative. Current account (CA) components: Balance of trade in goods: spending by consumers and firms on imported and exported goods. Exported goods have a positive effect on the current account, whereas importe...